Social Market Economy

Social Market Economy
History, Principles and

Implementation –
From A to Z
History, Principles and
Implementation –
From A to Z
Edited by
Rolf H. Hasse, Hermann Schneider & Klaus Weigelt
English edition
© 2008 Ferdinand Schöningh, Paderborn, Germany
All rights reserved
While copyright in this publication as a whole is vested in Verlag Ferdinand Schöningh GmbH,
Paderborn, Germany, copyright in the text rests with the individual contributors, and no section
may be reproduced in whole or part without the express permission, in writing, of both the con-
tributors and the publisher. It should be noted that any opinions expressed are the responsibility
of the individual contributors and that Ferdinand Schöningh does not necessarily subscribe to the
opinions of contributors.
ISBN: 978-0-9802543-7-2
Produced by:
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Translator: Vera Leckie

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First published in German: Lexikon Soziale Marktwirtschaft – Wirtschaftspolitik von A bis Z

ISBN 3-506-97018-6
© 2002 Verlag Ferdinand Schöningh GmbH, Paderborn, Germany
Second updated and extended edition, 2005
The editors
Prof. Dr Rolf H. Hasse was born in Berlin in 1940. He completed his undergrad-
uate studies in economics in Münster, Westphalia and Cologne. Hasse graduated in
1967 and completed his doctorate (1973) and post-doctoral qualification (1981) in
Cologne. From 1981 to 1998 he was Professor of Economics, in particular econom-
ic policy, at the University of the Federal Armed Forces in Hamburg. Hasse was at
the University of Leipzig from September 1998 to March 2006. Since March 2006
he has been acting manager of Fraunhofer-Zentrum für Mittel- und Osteuropa
(MOEZ), Leipzig. His main focus of research and publications include economic
policy, international business relations and European integration.
Dr Hermann Schneider was born in Niederwalgern (near Frankfurt) in 1940. He

completed his undergraduate studies in economics in Frankfurt and Marburg. After
graduation he became a research assistant in Marburg, concentrating on economic
policy. Schneider’s doctorate focused on development policy. He became a research
assistant for the Konrad-Adenauer-Stiftung (KAS) both in Germany and abroad.
Schneider was the KAS national representative in Colombia (1977–1982), and
director of the Science Project for Latin America (Buenos Aires) (1988–1994),
where he was able to focus on socio-economic institutional order policy issues.
Schneider was the KAS national representative in Chile from 1994 to 1996.
Dip Vw (Master in Economics) Klaus Weigelt was born in Königsberg, Prussia,

in 1941. He is an economist (Freiburg), and since 1971 he has been a KAS research
associate both in Germany and abroad. Weigelt was director of the KAS Academy for
11 years (1981–1992), KAS national representative in Caracas, Venezuela
(1975–1981), director of the KAS European Office in Brussels (1992–1998), and
director of the KAS foreign branch in Budapest, Hungary (2002–2007). The main
focus of his publications is institutional order policy and economic ethics in the
social market economy.
7
Preface
fter half a century of economic policy under the banner of the social market
A economy, the vast majority of Germans have accepted this as their country’s
economic order. This is particularly due to the consistent implementation of
the institutional order (Ordnungs) concept and the resulting rapid economic and
social successes in the initial phases of the Federal Republic. However, insight into
the context and functioning of the social market economy has declined considerably
over the years, while its interpretation has become highly arbitrary. Vital institu-
tional order policy principles of the social market economy have thus been diluted
beyond recognition. In public debate the social market economy has become almost
an empty formula that is used by all and sundry. In this way, the model of the social
market economy has become an example of the continuation of an idea, even
though its fundamental principles are often flawed in their implementation and its
core is under threat.
Economic policy in Germany is faced with enormous problems. At present,
neither its economic aims nor its social aims are being satisfactorily achieved.
Unresolved problems range from long-term unemployment to increasing demands
on the welfare system, the dangers of renewed inflation and the unanswered ques-
tions relating to an economic policy in a European context, as well as the worldwide
challenges of globalisation, environmental problems and poverty. The social market
economy in its conceptual form can offer answers to these questions and problems;
however, these answers have become obscured, with the result that they are no
longer clearly visible and are therefore not sufficiently used. The German and
European economic policies are looking for direction and are currently going
through an institutional order policy crisis.
The aim of this volume is to clarify the concept of the social market economy in
terms of economic and social policy and its political implementation. On the one
hand, it is an attempt to retrace the origins and basic principles of the social market
economy. On the other, it presents the different forms of social market economy, the
need for adaptation in the light of recent challenges, the objections to social market
economy and its prospects as a future economic and social system.
The book is aimed at the younger generation, which has the impartiality, openness
and critical attitude necessary for implementing reforms, as well as an openness to
conceptual orientation.
The editors and contributors have tried to summarise the essential aspects in short
articles and to formulate the sometimes difficult factual issues in comprehensible
8 Preface
language. Cross-referencing makes the book more user-friendly, while a glossary is

included for the explanation of specialised terms and their relevance.
In terms of work on the original German version, the editors are particularly
grateful to Prof. Dr Hans Willgerodt for his suggestions regarding the conceptual
unity of this work, to Marina Ignatjuk for her diligent work in coordinating and
editing the contributions, and to Wolfgang Reeder for selecting the illustrations and
diagrams.
The editors would like to thank all the contributors for their punctual and diligent
work. Particular thanks go to Joachim Hummel who managed and coordinated the
complicated task of editing the original German second edition. Furthermore, we
would like to thank the staff of the Institute for Economic Policy at the University
of Leipzig and the Konrad-Adenauer-Stiftung (KAS) in St. Augustin, which have
both contributed to the book’s success in many ways.
This english version is based on the second edition (2005) of the original German
work, with updates where relevant. At a time of international upheaval of institu-
tions and structures, its content responds to the lively interest in this subject as well
as providing invaluable information on institutional order policy (Ordnungspolitik).
Regarding this English version, we must acknowledge the translator Dr Vera
Leckie and the English language editors Tracy Seider and Richard Proctor-Sims for
their diligence and commitment to this challenging task.
The editors would also like to thank the KAS Johannesburg office staff for their
constructive collaboration in producing the English version of this book. KAS head
office deserves thanks for its immediate and positive response to the idea, for its
encouragement and support while the work was in progress, as well as for provid-
ing the necessary funds.
Rolf Hasse Hermann Schneider Klaus Weigelt

Leipzig Bonn Budapest
9
Contents
Alphabetical list of biographies and themes 11
Biographies 27
Themes 79
Glossary 477
Sub-division of themes 495
Abbreviations 503
List of tables, figures and other illustrations 505
List of contributors 507
Index
Biographies and other personalities 515
Themes 517
Appendix
Selected German economic research and advisory institutions 530

11
Alphabetical list of biographies and themes
Biographies
Beckerath, Erwin von 27

Norbert Kloten
Böhm, Franz 29
Ulrich Immenga
Briefs, Goetz A. 30
Anton Rauscher
Dietze, Constantin von 31

Nils Goldschmidt
Einaudi, Luigi 32
Hans Willgerodt
Engels, Wolfram 33
Rolf H. Hasse
Erhard, Ludwig Wilhem 34

Rainer Klump
Eucken, Walter Kurt Heinrich 36

Lüder Gerken
Frickhöffer, Wolfgang 39
Joachim Starbatty
Hayek, Friedrich August von 40

Gerd Habermann
Hensel, K. Paul 42
Gernot Gutmann
Höffner, Joseph Kardinal 43

André Habisch
12 Alphabetical list of biographies
Kamitz, Reinhard 45
Wolfgang Schmitz
Karrenberg, Friedrich 47
Martin Honecker
Lutz, Friedrich August 47

Verena Veit-Bachmann
Meyer, Fritz W. 49
Helmut Gröner
Miksch, Leonhard 50
Heinz-Dieter Smeets, Michael Sket
Müller-Armack, Alfred 52
Friedrun Quaas
Nell-Breuning, Oswald von 53

Lothar Roos
Nipperdey, Hans Carl 57

Hans-Jürgen Papier
Röpke, Wilhelm 58
Hans-Günter Krüsselberg
Rueff, Jacques 60
Josef Molsberger
Rüstow, Alexander 63
Jan Hegner
Schiller, Karl 65
Egon Tuchtfeldt
Schleyer, Hanns-Martin 67
Franz Schoser
Schmölders, Günter 67
Horst Zimmermann
Schreiber, Wilfrid 68
Heinz Lampert
Alphabetical list of biographies 13
Stoltenberg, Gerhard 70
Peter Wichert
Stützel, Wolfgang 72
Peter Bofinger
Thielicke, Helmut 74
Rolf Kramer
Veit, Otto 75
Hans Jörg Thieme
Welter, Erich 77
Walter Hamm
14 Alphabetical list of themes
Themes
Accident insurance 79
Albrecht Bossert
Achievement principle 80
Hans Willgerodt
Act Against Restraints of Competition 81

Kurt Stockmann
Agricultural policy 83
Stefan Tangermann
Balance of payments equilibrium 85

Marcus Cieleback
Banking system, structure and supervision 86

Stephan Paul, Peter T. Baltes
Basic rights, the Basic Law and social market economy 89

Hans Willgerodt
Basic social security 91

Jörg Althammer
Business accountancy: Basic concepts 93

Marc Richard
Business cycles 95
Adolf Wagner, Sabine Klinger
Business cycle policy 96

Capital markets 98
Stephan Paul
Catholic social doctrines 100

Lothar Roos
Chamber system 103

Hans Werner Hinz
Alphabetical list of themes 15
Chambers of commerce and industry 104

Dagmar Boving
Circular flow of incomes, national income and 106

national product
Co-determination 107
Gernot Fritz
Collective agreements 109

Gernot Fritz
Competition 111
Hans Peter Seitel
Concentration 114
Kurt Stockmann
Concerted Action and Alliance for Employment 116

(Konzertierte Aktion/Bündnis für Arbeit)
Walter Hamm
Conflicting aims in economic policy 118

Thomas Apolte
Conservatism 120
Klaus Weigelt
Constructivism 122
Christian Watrin
Consumer policy 126

Wolfgang Reeder
Council of Experts 128

Martin Wolburg
Currency system and exchange rate regimes 129

Wolf Schäfer
Demographic development 131

Thomas Straubhaar
Deregulation 135
Juergen B. Donges
Development aid, development policy 137

Hans-Rimbert Hemmer
Distribution 139
Jürgen Siebke
Economic ethics 141

Ingo Pies, Alexandra von Winning
Economic orders: Theory and implementation 143

Helmut Leipold
Education and research policy 146

Ulrich van Lith
Education funding 148

Ulrich van Lith
Employment 153
Ansgar Belke, Frank Baumgärtner
Employment policy 157

Ansgar Belke
Enterprise, plant 159

Kurt J. Lauk, Rainer Gerding
Entrepreneur, manager 161

Kurt J. Lauk, Rainer Gerding
Environmental impact 163

Paul Klemmer
Environmental policy: Actors 165

Bernd Hansjürgens
Environmental policy: Conflicting aims 167

Eberhard Feess
Environmental policy: Instruments 167

Alfred Endres
Environmental protection objectives 169

Fritz Söllner
Environment-oriented management 171

Ulrich Steger
European Central Bank, German Federal Bank 172

Reiner König
European Economic and Monetary Union 174

Rolf H. Hasse
European monetary policy: Actors 178

Diemo Dietrich
European monetary policy: Aims and duties 179

Diemo Dietrich
European monetary policy: Instruments 180

Diemo Dietrich
European monetary policy: Strategies 182

Diemo Dietrich
EU: Agricultural policy and enlargement east 183

Stefan Tangermann
EU: Budgeting 186

Alexander Schumann
EU: Competition policy 190

Peter Behrens
EU: Education and research policy 192

Ulrich van Lith
EU: Employment policy 194

Ansgar Belke
EU: Enlargement 197

Wolfgang Wessels, Jürgen Mittag
EU: Environmental policy 200

Helmut Karl
EU: History 202

Melanie Piepenschneider
EU: Industrial, research and technology policy 203

Joachim Starbatty, Andreas Schumm
EU: Maxims for action 206

Hans-Eckkart Scharrer
EU: Organs and institutions 208

EU: Reforms and consolidation – economic aspects 211

Daniel Piazolo
EU: Reforms and consolidation – political aspects 214

EU: Regional and structural policy 217

Reiner Martin
EU: Social policy 220

Hans Jürgen Rösner
EU: Trade policy 222

Detlef Böhle
EU: Transport policy 224

Karl-Hans Hartwig
Family policy 226

Federal Cartel Office 227

Kurt Stockmann
Federal Employment Agency 229

Gerhard D. Kleinhenz
Federal Republic (Bund), federal states (Länder) and municipalities 232

Klaus Dieter Diller
Financial constitution 233

Dietrich Dickertmann, Peter T. Baltes
Fiscal federalism 235

Foreign trade 238

Markus Neimke
Globalisation 241
Heinz Gert Preuße
Growth 245
Günter Gabisch
Health insurance 247

Albrecht Bossert
Housing policy: New federal states (Länder) 249

Katrin Leonhardt
Housing policy: Old federal states (Länder) 251

Winfried Michels
Income 254
Jörg Winterberg
Indebtedness of developing countries 257

Ronald Clapham
Individual responsibility 260

Lüder Gerken
Industrial action 261

Industrial policy 263

Peter Oberender, Stephan Ruckdäschel, Thomas Rudolf
Industrial relations constitution 266

Gernot Fritz
Institutional economics 267

Martin Leschke
Institutional order policy (Ordnungspolitik) and process policy 270

Hans Jörg Thieme
Institutional order policy (Ordnungspolitik): 271

Exemptions from competition rules
Norbert Eickhof
Integration 274
Karl Wolfgang Menck
Interest groups, lobbies 276

Werner Lachmann
International currency system 278

Carsten Eppendorfer
International Labour Organization 280

Peter Clever
International migrations 283

Thomas Straubhaar
International organisations 287

Marina Ignatjuk
Interventionism 290
Alfred Schüller, Thomas Welsch
Keynesianism 293
Labour law 295

Gernot Fritz
Labour market order 297

Labour market policy 300

Rüdiger Soltwedel
Liberalism 303
Ralph G. Anderegg
Managing and planning 305

Gernot Gutmann
Market economy 307

Joachim Starbatty
Market economy and public institutions 308

Hans Willgerodt
Market mechanism 310

Hermann Schneider
Markets and prices 312

Hans Peter Seitel
Media policy 313

Norbert Eickhof, Henning Never
Middle class policy 316

Eberhard Hamer
Monetarism 317
Roland Vaubel
Monetary order 318

Wim Kösters
New economy 320

Wolf Schäfer
Nursing care insurance 321

Albrecht Bossert
Occupational health and safety 323

Werner Schönig
Old-age pensions 325

Thomas Apolte
Open markets: Market entry, market exit 327

Dieter Fritz-Aßmus
Parastatals 329
Dietrich Dickertmann, Viktor Wilpert Piel
Patent system 331

Dieter Fritz-Aßmus
Pension insurance (additional services) 333

Werner Schönig
Policy consulting 334

Stefan Okruch
Political parties 337

Horst-Dieter Westerhoff
Poverty 340
Price level stability 343

Heinz-Dieter Smeets
Privatisation 347
Production and supply 349

Hans Peter Seitel
Profit 350
Marc Richard
Property 354
Heinrich Höfer
Protection of freedoms 356

Helmut Leipold
Protestant social ethics 358

Martin Honecker
Public debt 361

Dietrich Dickertmann, Annemarie Leiendecker
Public enterprises 363

Public expenditure 365

Public revenue 367

Public-private partnerships 371

Peter Oberender, Thomas Rudolf
Reconstruction East 373

Ullrich Heilemann, Hermann Rappen
Redemption Fund for Inherited Liabilities 375

Resource protection 377

Klaus W. Zimmermann
Reunification: Monetary, economic and social union 380

Rolf H. Hasse
Reunification: Monetary union through currency conversion 383

Peter Bofinger
Shadow economy 385

Wolf Schäfer
Social budget 386

Jörg Althammer
Social capital 389

Stefan Okruch
Social justice (social balancing) 390

Friedrun Quaas
Social market economy: An introduction 393

Friedrun Quaas
Social market economy: Concept of man 395

Klaus Weigelt
Social market economy: In the EU 398

Karl von Wogau
Social market economy: Political implementation 401

Christian Otto Schlecht
Social market economy: Principles and functioning 407

Social market economy: Social irenics 416

Friedrun Quaas
Social partners 418

Social partnership 419

Social policy 420

Heinz Lampert
Social policy: International 423

Social state and welfare state 424

Heinz Lampert
Social system 426

Heinz Lampert
Socialism/planned economy 429

Societal foundation of economic orders 431

Friedrun Quaas
Solidarity surtax 433

Speculation 435
Franz-Josef Leven
Statistics 436
Structural policy 439

Walter Hamm
Subsidies, government assistance 441

Supervisory offices 443

Dieter Fritz-Aßmus
Supply and demand 445

Hans Peter Seitel
Sustainability 448
Rolf H. Hasse
System(s) competition 449

Ronald Clapham
Tax policy 451

Wolfgang Reeder
Third ways: Mixed economy 454

Transport policy 456

Karl-Hans Hartwig
Treuhand Privatisation Agency (Treuhandanstalt) 458

Uwe Siegmund
Types of market economy 460

Joachim Starbatty
Unemployment: Causes and effects 463

Unemployment: Social security 467

Vocational training and further education 471

Ulrich van Lith
Wealth accumulation policy 473
Eckhard Knappe
World trade order 474

Dieter Bender
Erwin Emil von Beckerath 27
The First World War marked the

Biographies collapse of the old European political
order that had been established in 1815
by the Congress of Vienna, with its
world economic order of free trade and
Beckerath, Erwin Emil von the gold standard. Like many others,
Born 31 July 1889 von Beckerath asked himself how a new
Died 23 November 1964 order could be created from the chaos.
He studied the great political thinkers
Three historical periods influenced von from Machiavelli to Tocqueville, from
Beckerath’s life and career: the last decades Marx to Max Weber, but also Bergson,
before the First World War; the inter-war Lenin, Sorel, Mosca and Robert
years; and the emergence of the new political Michels. But most of all von Beckerath
and social order and the →social market studied Vilfredo Pareto and his teach-
economy in (Western) post-war Germany. ings about logical and illogical actions
Having grown up in one of Krefeld’s great and the ‘cycles of the elites’.
Mennonite merchant families, von Beckerath Von Beckerath examined fascism in
began to develop his interest in history, politics, Italy, which with the Stato Corporativo
economics and the social sciences under his might have qualified as a potential, albeit
academic supervisor, Dr Gustav von Schmo- dictatorial, system for economy and
ller. Even before the end of the war – and society. However, for reasons inherent in
influenced by the academic writings of the the system and influenced by Mus-
finance and transport expert Emil Sax – von solini’s fateful pact with Hitler in the
Beckerath turned his attention to the logic and 1930s, this system degenerated into one
clarity of the Vienna School of Marginal of the totalitarian systems of 20th centu-
Utility (doctrine of subjective value). It was ry Europe.
then that he started to teach this subject in his The Erwin von Beckerath Associa-
inimitable style, deepened by references to the tion thought hard about both the present
great economic thinkers of every school of and the future of a National Socialist
thought. Throughout his many years as chair- Germany caught up in a world war. The
person of the Scientific Advisory Council association had been started on a quasi-
(1948–1964), von Beckerath played a con- private basis in March 1943, after Class
siderable role in the implementation of the XI of the German Law Academy had
concept of the social market economy. been closed down by a government that
was growing increasingly suspicious.
After 1945, von Beckerath embarked on After the dissolution of the Associa-
a detailed analysis of the macro- tion for Social Policy (1936), Jens
economic ideas that John Maynard Jessen, executed in 1944 after the
Keynes had developed during the 1930s, attempt on Hitler’s life, had been trying
whose importance he recognised for to give to the economists who had lost
economic policy (→Keynesianism). In their home base a new forum in the
the decades prior to that, he had articu- ‘Economics Study Group’, chaired by
lated very clear ideas about the structure von Beckerath. In the association,
of a free post-war system. Erwin von Beckerath undertook to
28 Erwin Emil von Beckerath
work out ‘the principles of an econom- Among his historical writings on doc-
ic system for the transition period from trine and methodology, the biographical
war to peace, and the shape of the new contributions are seen as models of
economic system after the demise of appreciation for a scientist. Von Beck-
the regime’. The preliminary work of erath’s discourses on the theory of eco-
the association – today considered as nomic policy and his essays on political
one of the Freiburg resistance groups – policy are today still greatly valued.
which was already well advanced by
then, came to an abrupt end with the ACADEMIC AND PROFESSIONAL CAREER :
assassination attempt on Hitler in 1944. Undergraduate degree in History at

After the war, there were plans to Freiburg, followed by an Economics degree
in Berlin. On 18 March 1912 he received his
resuscitate the association when on 24
doctorate from the Friedrich-Wilhelm
January 1948, on the initiative of Ludwig
University in Berlin. From July 1913 until
→Erhard, the Economic Administration February 1915 he was assistant lecturer in
for the United Economic Zone (the eco- the Department of Economics at the Uni-
nomic administration for two zones) versity of Leipzig. From February 1915 until
established a scientific advisory body. Its January 1916, military service; subsequently
founder members →Eucken, →Böhm, made tutor to the Princes of Saxony as a
Lampe, Preiser, Wessels and von commissioned officer. From January 1916
Beckerath – who was quickly elected until March 1917, assistant staff member at
chairman – had already been part of the the Ministry for Public Works in Bremen; in
Erwin von Beckerath Association which March 1917, assistant lecturer in the Stieda
was then adequately replaced by the chair at the University of Leipzig. On 4 May
1918 post-doctoral lecturing qualification at
advisory body. The advisory body, which
the University of Leipzig under Karl
after the establishment of the Federal
Bücher; in January 1920, associate professor
Republic became affiliated with the of Economics at the University of Rostock;
Federal Ministry for Economic Affairs, in 1920, professorship in Economics at the
remained the undisputed model for University of Kiel; in 1924 at the University
independent political advisory organisa- of Cologne; from 1937 professor of
tions in the new Germany. It sustained Economics and Political Sciences at the
and inspired the birth of the social mar- University of Bonn until his retirement
ket economy with its reports, and von from academic service in 1957. From 1931 to
Beckerath remained its chairman until 1939, he was German director of the
his death in November 1964. German–Italian Cultural Institute (Petrarca-
Haus) in Cologne.
After he was made professor emeri-
tus in Bonn, von Beckerath lectured in
REFERENCES:
Basel at the request of Edgar Salin, to BECKERATH, E. v. (1927), Wesen und
whom he had been close since the Werden des faschistischen Staates, Berlin; —
foundation of the List Society in 1924. (1962), Lynkeus. Gestalten und Probleme aus
He was as involved in its re-establish- Wirtschaft und Politik, Tübingen; KLOTEN,
ment after the war (June 1955) as he N. (1966), Erwin von Beckerath, in:
was in the re-establishment of the Asso- Finanzarchiv, N. F. 25, pp. 193ff.
ciation for Social Policy (Verein für
Socialpolitik) (16 September 1948). Norbert Kloten
Franz Böhm 29
Böhm, Franz ist economy. However, and in large

Born 16 February 1895 measure due to Böhm, even politicians
Died 26 November 1977 had to concede that competition left to
its own devices eventually self-destructs,
unless restraints on competition are
made illegal.
In Germany, this led to the interna-
tionally recognised, highly advanced
→Act Against Restraints of Competition,
which even left its mark on the contin-
ued development of the Competition
Laws of the European Community. It
forms the basis for action by the
→Federal Cartel Office and the European
Commission against agreements and
mergers which restrict trade. Anyone
who feels they have a case can defend
themselves against improper use of eco-
nomic power by appealing to the courts.
Today, the Act Against Restraints of
Competition – often simply referred to
as the antitrust law – has become a fully
integrated part of the economic and
Böhm’s influence on the development of antisocial order.
trust law and competitive policy in the Federal Franz Böhm initiated this process
Republic as well as in today’s European with his most important work,
Union was considerable. With his academic Competition and the Battle against
work, he paved the way for the introduction of Monopolies, which was published in
a law against trade restrictions; a law that 1933. The Freiburg School where
makes it possible to take action against price Böhm and Walter →Eucken had a guid-
cartels, predatory competition or the creation of ing influence, started at around the
monopolies through company mergers. same time. It represents one specific
branch of the School of Ordo–→liberal-
During the 1920s and through tangible ism, a legal system of liberties which,
successes after the Second World War, too, imposes boundaries on state inter-
Böhm made his conclusion public that ventions. As a Member of Parliament,
economic →competition as a fundamental Böhm was involved in the creation of
element of a →market economy requires a the antitrust law that came into force in
legal framework. His conclusion was 1958.
frankly opposed to the currently prevail-
ing views on which aspects of an econo- ACADEMIC AND PROFESSIONAL CAREER :
my needed to be organised. Cartels and Professor Dr. jur. doctorate and post-doc-
business conglomerates were seen as an toral lecturing qualification in Law; senior
inevitable phenomenon of a late capital- university lecturer at Freiburg in 1933, lec-
30 Goetz A. Briefs
turer at the University of Jena until the worker in a liberal-capitalist age, Briefs
withdrawal of his lecturer’s licence on polit- saw the transition from the ‘classical’ to
ical grounds in 1938. 1946–1962: incum- the ‘consolidated’ trade unions as a
bent of the chair for Civil, Commercial and
problem in that they were trying to gain
Economic Law in Frankfurt. 1952–1964:
and exercise control over companies
served a member of parliament for the
Christian Democratic Union and led the
and the workforce.
German Delegation which negotiated repa- Briefs was a proponent of the social
ration agreements with the state of Israel market economy, which he saw as being
and the Jewish international associations. under threat by the demands for ‘parity
in →co-determination’ and the ‘democra-
REFERENCES: tisation’ of the economy and all other
BÖHM, F. (1933), Wettbewerb und aspects of society.
Monopolkampf, Berlin (Reprint 1964,
Cologne); — (1937), Die Ordnung der ACADEMIC AND PROFESSIONAL CAREER :
Wirtschaft als geschichtliche Aufgabe und rechtss- Briefs initially embarked on undergraduate
chöpferische Leistung, Stuttgart, Berlin; — studies of Philosophy and History in
(1960), Über die Ordnung einer freien Munich, but then changed to Economics in
Gesellschaft, einer freien Wirtschaft und Freiburg, where he submitted his doctoral
über die Wiedergutmachung, in: Mest- thesis on the spirits monopoly. After a brief
mäcker, E.-J. (ed), Reden und Schriften, stay in England, Briefs gained his qualifica-
Karlsruhe. tion as a university lecturer in 1913 with a
dissertation on the profit rate in Classical
Ulrich Immenga Economics. In 1919, Briefs took up a lectur-
ing position at the University of Freiburg.
There, the witty humanist and devout
Christian wrote a critical appraisal of
Briefs, Goetz A.
Oswald Spengler’s book The Decline of the
Born 1 January 1889 Western World. This is where he developed
Died 16 May 1974 the category of the ‘moral limit’, arguing
that under competitive pressure unscrupu-
Thanks to his unusual academic and analy- lous outsiders may sacrifice the ethical min-
tical ability, Briefs became known for his imum and that this might be copied by all
ruthless pronouncements on the structural the economic players. In 1921 he accepted
weaknesses of the industrialised nations. He an academic position in Würzburg, only to
was not just an economist but also had a pro- return to Freiburg in 1923 where he com-
found understanding of economic history. posed his first long essay on labour issues,
Moreover, Briefs was firmly anchored in a ‘The Industrial Proletariat’. Having been
one of the creators of the Regulations for
Christian view of ‘Man and Society’.
Works Councils in 1920, Briefs was called to
Berlin in 1926 where he set up the Institute
While initially Briefs stressed the posi- for Business Sociology and Social Business
tive role of the trade unions in terms of Studies. He produced numerous publica-
their social subjugation of capitalism, tions on trade union issues and business
after the Second World War he became sociology, critiques of the capitalist class sys-
increasingly critical of them. Consid- tem as well as essays on social ethics. In 1930
ering the fact that they had been set up Briefs became a member of the Königs-
as protective organisations for the winter Circle, which laid the groundwork
Constantin von Dietze 31
for the encyclical Quadragesimo Anno (1931). of post-war Germany, primarily through his
In 1934, Briefs managed to flee to the public work and commitment to a social and
United States where he became familiar economic life on the basis of his Christian
with American developments, including the
Protestant faith.
teachings of Keynes and the work of J. A.
Schumpeter. Following his stay as a visiting
professor at the Catholic University of
Due to his staunch character, von
America, Briefs accepted a position at Dietze was opposed to Hitler’s regime
Georgetown University. In 1960, he early on. As chairman of the Association
received an honorary doctorate for political for Social Policy – the most important
science from the University of Munich. For association of economists in Germany –
his 80th birthday, Briefs’s pupils, friends and von Dietze saved the association from
colleagues presented him with a commem- national socialist interference by dis-
orative publication. solving it in 1936.
He was briefly arrested for the first
REFERENCES:
time in 1937 while standing in for an
BRIEFS, G. (1926), Das industrielle Proletariat,
imprisoned pastor in a church service.
Tübingen; — (1927), Gewerkschaftswesen
After this incident von Dietze had to
und Gewerkschaftspolitik, in: HdSt. Vol. 4,
pp. 1108 ff.; — (1952), Zwischen Kapitalismus leave the University of Berlin. He took
und Syndikalismus. Die Gewerkschaften am a position at the Faculty of Law and
Scheideweg, Bern, Munich; — (1955), Das Political Science in Freiburg. There he
Gewerkschaftsproblem gestern und heute, exchanged ideas with the ‘founding
Frankfurt/M. (1968 under the title.: Gewerk- fathers’ of the Freiburg School and the
schaftsprobleme in unserer Zeit. Beiträge zur ordo-liberalism of Walter →Eucken.
Standortbestimmung); AMSTAD, A. (1985), The dissident Bonhoeffer Circle in
Das Werk von Goetz Briefs als Beitrag zu Freiburg, of which he was a co-founder,
Sozialwissenschaft und Gesellschaftskritik aus der had been asked by the provisional lead-
Sicht christlicher Sozialphilosophie, Berlin (with
ers of the Confessional Church to write
references).
a memorandum on post-war Germany.
Anton Rauscher
Together with Walter Eucken and Adolf
Lampe, von Dietze compiled The
Economic and Social Order, which con-
tains passages that resemble an early
Dietze, Constantin von manifesto of the →social market economy.
Born 9 August 1891 After the attempt to assassinate Hitler
Died 18 March 1973 on 20 July 1944, some parts of the
memorandum fell into the hands of the
A full appreciation of the significance of Gestapo and von Dietze was arrested
Constantin von Dietze for the emergence and again. He escaped a certain death sen-
development of the social market economy is tence thanks to the collapse of the
impossible if only his (however important) Third Reich.
theoretical articles on economics and particu- After the war, von Dietze, together
larly on modern agricultural economics are with other members of the Freiburg
taken into account. Von Dietze had a much Circle, was behind the foundation of
more lasting influence on the economic order the inter-denominational and decidedly
32 Luigi Einaudi
market-orientated Christian Social Einaudi, Luigi

People’s Party of Baden, which was Born 24 March 1874
subsequently incorporated into the Died 30 October 1961
Christian Democratic Union.
Beyond that, von Dietze was a ded- Luigi Einaudi started publishing the maga-
icated academic and rector at the zine Riforma Sociale in 1908. After it was
University of Freiburg (1946–1949). banned in 1935, he replaced it with the
He was also a leading member of the Rivista di storia economica, without com-
Protestant Church and was involved in promising on the content but including more
the establishment of the Federal material on the integration of economic theory
Republic of Germany, always aware that and history. It was there that Einaudi pub-
‘every economic order must be based lished his sensational endorsement of the book
on specific political and moral princi- by Wilhelm →Röpke, The Social Crisis
ples’. of the Present Day, which was subsequent-
ly banned in Germany. Like Röpke,
ACADEMIC CAREER: 1909–1912 undergradu- Einaudi was an outspoken and thoughtful
ate studies in Law and Political Sciences at proponent of a competitive →market econ-
Cambridge, Tübingen and Halle. omy that favours neither private monopolies
1913–1918 active service and captivity. 1919 nor state control, and where political cronyism
Doctorate at the University of Breslau. 1922
has no place. Einaudi advocated the accumu-
Post-doctoral lecturing qualification at the
lation of assets through savings and considered
University of Berlin. 1925–1961 professor-
ships at the universities of Rostock
the taxation of saved income as well as the
(1925–1927), Jena (1927–1933), Berlin resulting proceeds as double taxation. His
(1933–1937) and Freiburg (1937–1961). concept of consumer taxation had a modern
1955–1961 presiding member of the Synod ring to it. In terms of social policy, Einaudi
of the Protestant Church in Germany. supported individual responsibility and equal
opportunities, and was in favour of private
REFERENCES: property for large sectors of society. He also
DIETZE, C. v./EUCKEN, W./ LAMPE, A. wanted to preserve the peasant class in its tra-
(1942/1979), Wirtschafts- und Sozial- ditional form as a counterbalance to the trend
ordnung, in: In der Stunde Null. Die towards proletarianisation, for example, in
Denkschrift des Freiburger ‘Bonhoeffer-Kreises’:
anonymous tenement housing. As a liberal
Politische Gemeinschaftsordnung. Ein Versuch des
thinker with a broadly conceptual approach,
christlichen Gewissens in den politischen Nöten
unserer Zeit, Tübingen, pp. 128-145; DIET- Einaudi convincingly defended his view – in
ZE, C. v. (1962), Gedanken und Bekenntnisse opposition to the philosopher Benedetto Croce
eines Agrarpolitikers, Göttingen; — (1967), – that intellectual, moral and political freedom
Grundzüge der Agrarpolitik, Hamburg, Berlin. without economic freedom is impossible.
Nils Goldschmidt In 1928, Einaudi and others voted

against the fascist government in Italy’s
Senate, and in 1935 he opposed the
unconditional approval of the war with
Ethiopia. Einaudi wanted to see Europe
politically united in a defence alliance.
Wolfram Engels 33
He contested the financing of budget ica sociale, Torino; BENEDETTO, C./EIN-

deficits and bread subsidies by the cen- AUDI, L. (1957), Liberismo e Liberalismo,
tral bank and succeeded in putting the Milano, Napoli.
national budget back on an even keel.
Hans Willgerodt
Einaudi also achieved the stabilisation
of the lira at the current level of infla-
tion without monetary reform.
Similarly to Jacques →Rueff, Ludwig Engels, Wolfram
→Erhard and Reinhard →Kamitz, Born 15 August 1933
Einaudi was able, as a neo-liberal pro- Died 30 April 1995
fessor, to put his theories into practice
with great success. Together with Engels was one of a number of economists
Konrad Adenauer and Shigeru Yoshida, who always advocated and defended the social
Einaudi was one of the great old men market economy and its principles in their
who, with determination and calm, ini- research, teaching and publications. He was
tiated the reconstruction of their ruined also one of the few economists who knew that
countries after the Second World War. economics and business management are so
closely linked as to be virtually one entity, and
ACADEMIC AND PROFESSIONAL CAREER: After who continually demonstrated this through
his doctorate (1895), initially economics his extensive knowledge. This gave Engels
editor at the daily paper Stampa. 1902–1948 added credibility when he had the courage to
professor of Finance at the University of stand up for his beliefs during the 1968 stu-
Turin and professor of Political Economics
dent uprisings at the University of Frankfurt,
at the Technical College. In 1920, additional
opposing the Marxist spokesman with his
professorship at the Bacconi University in
Milan. From 1925, forced to restrict his
sober arguments and upholding the principle
teaching activities to the University of of individual freedom and the advantages of
Turin. Became a Senator of the Kingdom of the market economy over all the many per-
Italy in 1919, and was appointed rector of mutations of collective or state-controlled
the University of Turin in 1943 by a govern- economies.
ment that was no longer fascist. Managed to
escape fascist persecution by fleeing across This phase was instrumental in turning
the Alps to Switzerland. 1945–1948 Gover- Engels into a political economist in the
nor of the Banca d’Italia, member of the spirit of →liberalism. He took it upon
Constituent Assembly, and from May 1947 himself to support the development of
Minister of Finance and Deputy Prime
the →social market economy and to protect
Minister. 1948–1955 Italian President.
it against genuine enemies and false
Involvement in the newspaper Corriere della
Sera from 1900 followed by his withdrawal friends. Studies like On Civic Taxation
in 1925 as an act of protest against fascist (1973, with J. Mietschke), on the inte-
control. 1908–1946 correspondent for The gration of individual taxes with personal
Economist. social transfers, his writings on wealth
creation (1974), on the labour market
REFERENCES: and co-determination (1974 and 1978)
EINAUDI, L. (1958), Saggi sul risparmio e as well as his essays concerning the
l`imposta, Torino; — (1964), Lezioni di polit- social market economy (including More
34 Ludwig Wilhelm Erhard
Market: Social Market Economy as Political Erhard, Ludwig Wilhelm

Economy, 1976; Thirty Years of Social Born 4 February 1897
Market Economy Experienced But Not Died 5 May 1977
Understood, 1979) and his writings on
economic and social policy (A
Constructive Critique of the Welfare State,
1979; Die Wende: Taking Stock of German
Economic Policy, 1984) are testimony to
this self-imposed task.
But this did not mean that Engels
was neglecting his other major academ-
ic interest: banking and the monetary
and financial markets. Having analysed
them creatively and critically, he provid-
ed suggestions on how to stimulate the
markets and →competition. In his capaci-
ty as editor of the weekly Wirtschafts-
woche, Engels was able to give a wide
audience access to his articulate and
innovative ideas on institutional order
policy.
ACADEMIC AND PROFESSIONAL CAREER : Erhard made a significant contribution to the

1953–1955 management apprenticeship in restructuring of the German economic system
Bremen; 1955–1961 undergraduate studies; and to the birth of the ‘economic miracle’. It
1961–1964 sales manager in the textile was he who popularised the term →social
industry; doctorate in 1962; 1964–1968
market economy in Germany. His aim
assistant lecturer; 1968 postdoctoral lectur-
was ‘prosperity for all’ in a free society. As
ing qualification with W. →Stützel;
1968–1995 professor at the Johann
Federal Chancellor, Erhard tried to encourage
Wolfgang Goethe University, Frankfurt; the socio-political acceptance of the social mar-
1984–1987 editor of the Wirtschaftswoche; ket economy. It was his hope that more under-
Awards: The Ludwig Erhard prize and oth- standing of and information on economic
ers. issues would be able to prevent institutional
order policy aberrations. This is why he estab-
REFERENCES: lished a →Council of Experts who were
ENGELS, W. (1970), Soziale Marktwirtschaft appointed to monitor overall economic
als Politische Ökonomie, Stuttgart; — (1996), progress. His concept of a ‘formed society’ –
Der Kapitalismus und seine Krisen. Über where particular group interests are overcome
Papiergeld und das Elend der Finanzmärkte,
through cooperation and competitive pressure
Düsseldorf.
– remained utopian.
Rolf H. Hasse
Even before the end of the war, Erhard
had composed a memorandum that
emphasised the need for currency
Ludwig Wilhelm Erhard 35
reform. In 1947, he was made director principles of the market economy were
of the Homburg Special Bureau for taken into account in the process of
Monetary and Currency Matters. Based European economic integration.
on different reform drafts by German On the occasion of the currency
experts, the bureau submitted the reform Erhard had already suggested
Homburg Plan for German currency the urgency of an effective German
reform. Elements of this plan were antitrust law being put in place. For
adopted by the Allies in the currency him, anti-competitive company agree-
reform that took place in the three ments and inflation remained the two
Western zones on 20 June 1948. greatest threats to a successful social
From March 1948, Erhard, who was market economy. When the →Act
economic director of the bizone, was Against Restraints of Competition was final-
faced with the task of complementing ly passed in 1957, Erhard had only part-
the currency reform with an appropriate ly succeeded. While it is true that the
economic reform. Germany was at that Act imposed a general ban on cartels, a
time subject to an all-encompassing sys- long list of areas and issues were
tem of government price controls and exempt from the rules.
regulations on economic management. In the same year, the Federal
Concurrently, with the replacement Banking Act declared the independence
of the Reichsmark by the Deutschmark, of the central bank (→European Central
Erhard decided to initiate the complete Bank, German Federal Bank) and its
removal of state control and to rely on commitment to →price level stability.
the effectiveness of the free markets. Erhard had been a keen supporter of
However, Erhard was aware of the both these key elements of the financial
fact that without a stable new currency it system.
would not be possible to revert to a free
market economy. Only an efficient mar- ACADEMIC AND PROFESSIONAL CAREER :
ket economy would be able to demon- 1919–1922 studies at the College of

strate its extraordinary capacity to satisfy Commerce in Nuremberg; 1925 doctorate
material needs to the full, win lasting in Frankfurt; 1928–1942 economic research
at an institute in Nürnberg; 1945–1946
acceptance by the people and become a
Bavarian Minister of Economic Affairs;
genuine social market economy.
1947 honorary professorship at the
The sharp productivity increase and University of Munich; 1947–1948 director
the visible reduction of goods shortages of the Special Bureau for Monetary and
after the currency reform endorsed Currency Matters in Bad Homburg;
Erhard’s market-orientated economic 1948–1949 administrative director of
policy, which he continued to pursue as Economic Affairs in the British-American
Federal Minister of Economic Affairs. bizone; 1949–1977 Member of the German
From very early on, Erhard Parliament; 1949–1963 Federal Minister of
favoured a far-reaching liberalisation of Economic Affairs; 1963–1966 Federal
foreign trade in order to see Germany Chancellor; 1966–1967 Chief Whip of the
becoming more deeply rooted in the Christian Democratic Union.
world economy (→foreign trade). It is
thanks to his sustained efforts that the
36 Walter Kurt Heinrich Eucken
REFERENCES: Eucken saw power – of a private as well as a

ERHARD, L. (1977), Kriegsfinanzierung und public nature – as a central problem in mod-
Schuldenkonsolidierung, fax print out of the ern economic systems and demanded that, in
commemorative publication from 1943/44,
order to restrain it, the state should adopt insti-
Frankfurt, Berlin, Vienna; — (1953), Deutsch-
tutional order policies which adhere to the
lands Rückkehr zum Weltmarkt, Düsseldorf; —
(1957), Wohlstand für alle, Düsseldorf; —
principle of competition, and that there must
(1962) Deutsche Wirtschaftspolitik. Der Weg der be no interference with the economic process.
Sozialen Marktwirtschaft, Düsseldorf, Vienna,
Frankfurt. Eucken’s insights were strongly influ-
enced by personal observations dating
Rainer Klump back to the time before and after the
First World War.
Before 1914, governments used to
Eucken, Walter Kurt Heinrich follow the classical liberal principle of
Born 17 January 1891 laissez-faire: the state simply provides a
Died 20 March 1950 legal framework and otherwise leaves
the economy to its own devices. This
policy was based on the individual’s
right to freedom. The consequence,
however, was that monopolies and car-
tels started to dominate many sectors of
the economy because economic actors
considered competition to be a nui-
sance and a threat to their attempt to
monopolise. This is how private power
blocs come about. Eucken saw this as a
serious obstacle to the right to freedom
of others. During the era of laissez-
faire, the abundance of freedom turned
into a threat to freedom itself, because it
allowed private power build-ups.
After the First World War, economic
policy changed fundamentally and
became the opposite of what it had
been. The state started to intervene in
the economy more and more and tried
‘How can the modern industrialised economy to exercise control through policies
be integrated into a system which is both effec- aimed at preventing →business cycles,
tive and humane?’ Walter Eucken asked him- →... monetary policy, →subsidies, etc. de-
self this question, which animates his life’s pending on the specific situation.This
work. His answer was the development of the meant that now the state had a great
concepts which Ludwig →Erhard imple- deal of power at its disposal.
mented, and which led to the German eco- In this, Eucken recognised the hall-
nomic miracle after the Second World War. mark of centrally controlled economies
Walter Kurt Heinrich Eucken 37
(→socialism, →constructivism, →third should an economic policy look like? In

ways). The problem of power as a other words, how can the modern
restriction to freedom had therefore not industrialised economy be integrated
been solved, but only displaced. into a system which is both functional
Beyond that, there is another conse- and humane? In answer to this ques-
quence of interventionist economic pol- tion, Eucken developed his famous
icy. An economic policy which deals concept of →institutional order policy
with individual cases on their own merit (Ordnungspolitik).
will always affect everybody differently. Institutional order policy is the kind
Certain groups will benefit while others of economic policy which forms the
will be disadvantaged. This is the moti- content of an economic system.
vation for the formation of private Opposed to institutional order policy is
→interest groups whose purpose is to fight →process policy. The latter concerns
for economic policies which benefit those economic policy measures which
their members. The members then politicians use to intervene in the actu-
exploit the privileges granted by the al economic process, and which affect
state to secure more privileges for them- the way it runs either directly or indi-
selves. This is how the state is put under rectly.
pressure by these groups and eventually The fundamentally disparate nature
becomes dependent on them (→inter- of these two categories of economic
ventionism). policy showed Eucken the dividing line
Thus interventionist economic poli- between legitimate and necessary eco-
cies lead to a dual power problem: while nomic policy on the one hand, and ille-
expanding its power through various gitimate economic policy on the other.
interventions into routine economic Economic policy should give content to
processes, the state comes increasingly the economic order without influenc-
under the influence of powerful eco- ing the economic process.
nomic groups. A great many different economic
In the modern economy, therefore, systems are, in theory, possible. Eucken
personal freedom is equally under identified three basic types: the central-
threat from public and private power. It ly controlled economy; an economic
is widely believed that the problem of system based on monopolies; and a
private economic power can be solved competitive system. He devoted much
only if the state seizes it. However, this time to studying the centrally con-
cannot be the solution as far as individ- trolled economy and subjected it to a
ual freedom is concerned. According to thorough critical analysis. There is no
Eucken, the problem of economic need for further elaboration on this
power can never be solved through fur- point because the matter of the central-
ther concentration of power. The fact is ly administered economy was famously
that, on the contrary, the freedom of the settled after the events of 1989.
individual must be safeguarded with Economic structures based on
respect to the other citizens and to the monopolies are characterised by the fact
state. that the individual goods and job mar-
In the light of this dilemma, what kets are dominated by monopolies or
38 Walter Kurt Heinrich Eucken
similar structures such as cartels. It, too, • freedom of market entry (→open mar-
was rejected by Eucken for the afore- kets), which involves the removal of
mentioned reasons. both public and private economic
What remained was the competitive barriers to market entry;
order. For Eucken, this was the eco-
nomic structure that allowed for the • →private property;
highest degree of personal freedom as it
restricts the powers of the state (unlike • freedom to enter into contracts;
the centrally controlled economy) and
(unlike the monopolistic economy) also • →individual responsibility and the liabil-
curbs private power. ity of each economic participant for
→Competition – where suppliers his/her own economic actions; and
compete for the favour of buyers, while
buyers compete for the favour of sup- • a consistent, steady economic policy
pliers – is the one process that does not in order to avoid uncertainty.
allow power reservoirs that are prone to
abuse to build-up. This is because in a Eucken was also deeply concerned
competitive system the actors in the with social issues, which helped him
markets can always choose from several form his conclusions. He made it
business partners. unmistakably clear that no economic
As the laissez-faire model before the order would survive for long unless
First World War showed, a competitive these social aspects were taken into
economic order does not emerge by consideration. He believed, for exam-
itself. So what should the state do to ple, that a social conscience cannot tol-
establish and maintain it? In other erate mass unemployment – and nor
words: which institutional order policy can the state.
should be adopted? Eucken identified However, Eucken was very critical
seven conditions which have to be ful- of the traditional →social policy because
filled for the creation of a resilient com- it interferes with the right to personal
petitive order. freedom by forcing everybody into state
The first and most important condi- insurance schemes. In Eucken’s view,
tion is a market structure based on a this incapacitates the individual by
sound pricing system, which must be a making the citizen increasingly depen-
realistic reflection of relative scarcity dent on the state. Eucken saw this as
combined with a high degree of com- almost a sort of enslavement by the
petitive pressure. The competitive pres- state and, as a consequence of the denial
sure increases with the number of sup- of basic human rights, the destruction
pliers and buyers who are active in the of what makes us human.
market. This makes a general ban on This is why, according to Eucken, if
cartels and monopolies the necessary social policy is to be successful there has
consequence. The other six conditions to be an institutional order policy at the
can only be listed here: same time. And the problem of mass
unemployment can be solved only if
• a stable currency; the principles of competition also find
Wolfgang Frickhöffer 39
application in the labour market. Trade to be its fervent supporters but thought noth-
unions and employers’ associations ing of betraying their conviction when things
would then not be able to behave like became difficult. For Frickhöffer, the social
monopolies and negotiate binding wage market economy was no fair weather system,
agreements, but wage levels would be but a concept for all seasons.
decided freely by the market.
Regarding social security, Eucken Frickhöffer had to contend with all the
wanted to lean much more on the pri- vicissitudes of the war and the post-war
vate initiative of the individual: the period. Immediately after graduating
political system was giving the citizens from the Berlin-Steglitz Gymnasium
every opportunity to secure themselves. with a classical education, he was called
In Eucken’s view, a public welfare sys- up for compulsory labour and military
tem was only justified when self-help service and ended up in captivity. After
and insurance did not suffice; but, the war, he supported himself with var-
whenever possible, the free initiative of ious jobs: he was a part-time journalist
the individual had preference. (1949–1952); became a certified inter-
preter (1951–1954); and studied eco-
ACADEMIC AND PROFESSIONAL CAREER : nomics at the University of Heidelberg.
1909–1913 undergraduate studies in Kiel, Alexander →Rüstow, who, after his
Bonn and Jena, 1913 doctorate in Bonn; return from Turkey had succeeded to
1913–1918 military service; 1919–1925
Alfred Weber’s chair at the University of
University of Berlin, 1921 post-doctoral
Heidelberg, was his most influential
lecturing qualification, then assistant profes-
sor; 1925–1927 professorship in Tübingen;
teacher.
1927–1950 professorship in Freiburg. In January 1954, Frickhöffer accept-
ed the position that would become the
REFERENCES: core of his life’s work: he became secre-
EUCKEN, W. (1961), Nationalökonomie tary of the Social Market Economy
wozu?, 4th edition, Düsseldorf; — (1989), Action Group (Aktionsgemeinschaft
Die Grundlagen der Nationalökonomie, 9th edi- Soziale Marktwirtschaft – ASM). After the
tion, Berlin; — (1990), Grundsätze der death of Alexander Rüstow, Frick-
Wirtschaftspolitik, 6th edition., Tübingen. höffer’s academic mentor and previous
chairman of the ASM, Frickhöffer
Lüder Gerken
became his successor in 1962.
The ASM provided Ludwig
→Erhard with staunchly supportive
Frickhöffer, Wolfgang publicity for his reconstruction and
Born 26 May 1921 reform policies. It was here that the
Died 31 October 1991 guardians of the doctrine of the social
market economy found a platform for
Frickhöffer was generally known as the their ideas and concepts and took on
‘watchdog of the social market economy’ and the role of political opinion-makers.
was a man who was equally merciless The →Act Against Restraints of
towards the declared enemies of the →social Competition, the autonomy of the
market economy and those who pretended →German Federal Bank and the organi-
40 Friedrich August von Hayek
sation of the European Community cians and his nagging is not always
were topics under intense discussion at comfortable, but he is fighting a just
these meetings, while repeated, fervent fight.’
debates about currency revaluations
and the floating of the exchange rate REFERENCES:
were also on the agenda. RÜSTOW, A. (1963), Rede und Antwort,

Karl →Schiller, the Minister of Ludwigsburg; FRICKHÖFFER, W. (1964),
Economic Affairs, delivered lectures on Deutsche Politik als marktwirtschaftliches
Beispiel, in: Aktion Soziale Marktwirtschaft,
social symmetry and the recovery
Ehrliche Weltoffenheit als deutscher EWG-
process after an economic slump. In
Beitrag, Tagungsprotokoll, 22, Ludwigsburg;
short, the ASM was, and still is, a place — (1969), Gesellschaftspolitische
where the future course of the market Folgerungen in einer freiheitlichen
economy is considered and where clear Ordnung – von sozialen Fiktionen zu realis-
pointers are put in place. tischer Politik, in: Aktionsgemeinschaft Soziale
Although Frickhöffer always Marktwirtschaft, Freiheitliche Politik für eine freie
ensured that this remained the case, he Welt, Tagungsprotokoll, 32, Ludwigsburg.
did not simply offer to the architects of
the social market economy a highly Joachim Starbatty
respected platform; instead, he actually
initiated and encouraged national and
international debate – not least through Hayek, Friedrich August von
the Mont Pèlerin Society. Born 8 May 1899
At the same time he was not afraid Died 23 March 1992
to make public and private statements
on the current political situation from
the perspective of the market economy.
He could be very blunt when he sus-
pected or was able to prove bungling,
disimprovements or institutional order
policy breaches.
The former Federal Minister of
Economic Affairs, Otto Count
Lambsdorff, paid tribute to Frickhöffer
for playing the role of the admonishing
voice and for his commitment to the
cause of the res publica by saying: ‘It is
Wolfgang Frickhöffer’s great contribu- Hayek is seen as one of the most important
tion to have been able, with penetrating representatives of ‘neo-liberalism’ of the war
knowledge and without having to make generation. In 1974 he was awarded the
allowances for the political conventions Nobel Prize for his comprehensive work on
of the day, to lay his finger on the economics and social philosophy. As a liberal
wounds which keep being inflicted on of the classical tradition he was one of the fore-
the market economy. His advice and his most critics of socialism and the welfare state,
comments are a wake-up call for politi- while also being a fearless supporter of a free
Friedrich August von Hayek 41
society. Hayek was intellectually close to the leading to the discovery of facts which
‘founding fathers’ of the social market econo- would otherwise either remain
my, especially Wilhelm →Röpke, Walter unknown or would at least not be
→Eucken and Ludwig →Erhard. It is true utilised’.
that he strongly criticised the term ‘social’ for Although Hayek was one of the
being too vague. harshest critics of the →welfare state and
had even laid out propositions for the
Hayek’s comprehensive body of work ‘denationalisation of currencies’, he
grew out of a critical analysis of the cannot be seen as a typical representa-
‘constructivist’, planned or centrally tive of the ‘laissez-faire tradition’.
controlled economy typical of the total- Rather he was an excellent analyst of
itarian systems. He proved that social- the institutional framework (albeit not
ism is not only doomed to failure predominantly of the state), which
because enterprises cannot make eco- requires a spontaneous order.
nomic calculations without scarcity- Furthermore – to the annoyance of
related prices, as his teacher Ludwig some of his friends – Hayek supported
von Mieses had discovered, but also for the concept of basic social security, but
reasons concerned with information not through a monopolistic state insur-
theory. He called it a ‘presumption of ance scheme. Nonetheless he was one
knowledge’ to want to centrally store all of the most outspoken champions of a
the knowledge, which is so dispersed free society.
among people and places, which is During his later years, Hayek drew
ever-changing, and which has accumu- up a political reform plan for democra-
lated throughout history and endless tic systems, which has hitherto not
experience. aroused much interest. His primary
Hayek’s detailed theory of ‘sponta- concern here was to reinstate the sepa-
neous order’ draws especially freely on ration of powers through a bicameral
the ideas of the 18th century Scottish system where one chamber, made up of
order theorists (Ferguson, Smith, economically independent representa-
Hume). He showed convincingly that a tives of different age groups, has the
spontaneous, complex economic sys- task of ensuring that the executive
tem is the result of human action but observes the general, abstract rules
not of rational design. The market, without giving specific pressure groups
morality, the law or language were not an unfair advantage.
‘invented’ by anyone in particular; Hayek’s influence has been growing
rather, these institutions developed in a steadily since the 1970s. His impact on
historical process of trial and error Ronald Regan’s reforms in the United
where only those groups succeeded States and on Margaret Thatcher in the
who ‘discovered’, above all, private United Kingdom was considerable.
→property and the appropriate moral The Friedrich August von Hayek
rules. Society in Berlin, founded in 1998, is
Hayek became particularly famous currently involved in the publication of
for his contribution to the theory of his German works and the organisation
competition: →competition is ‘a process of public events.
42 K. Paul Hensel
ACADEMIC CAREER: Undergraduate studies compared with the market economies of dem-
in Law and Political Sciences at the ocratic systems. No other institute, except per-
University of Vienna; 1929 post-doctoral haps the Eastern European Institute at the
lecturing qualification in Vienna. From the
Free University of Berlin, produced as many
end of 1931 onwards a professorship at the
dissertations, theses and postdoctoral theses on
London School of Economics; 1947 co-
founder of the Mont Pèlerin Society; 1950
this subject as Hensel’s research centre in
professor of Social and Moral Sciences at Marburg. Until the end of his life, Hensel
the University of Chicago; 1962 accepts a had a considerable impact on this branch of
position at Freiburg; 1968–1977 visiting economic research.
professor at the University of Salzburg;
1974 Nobel Prize for Economic Sciences Even before coming under the influ-
together with Gunnar Myrdal; 1991 the ence of his academic teacher Walter
Presidential Medal of Freedom from the Eucken (the founder of the Freiburg
United States President. School of Economics, which dealt with
questions of institutional order theory
REFERENCES:
and policy), Hensel’s experiences dur-
HAYEK, F. A. von (2003), Der Weg zur
ing his vocational training before he
Knechtschaft, 3rd edition, Munich; — (1991),
Die Verfassung der Freiheit, 3rd edition, was a student had awakened a particular
Tübingen; HABERMANN, G. (ed) (2001), academic interest in him in the intellec-
Philosophie der Freiheit. Ein Friedrich-August- tual approach to ‘socialist’ and ‘capital-
von-Hayek-Brevier, 3rd edition, Thun; ist’ economic systems, the way they
HENNECKE, H. J. (2000), Friedrich August function and the effect they have on
von Hayek: die Tradition der Freiheit, people.
Düsseldorf. This problem mattered not only for
abstract, theoretical reasons, but it kept
Gerd Habermann the world in suspense for decades while
playing a crucial role in the fate of mil-
lions of people (→socialism/planned econ-
Hensel, K. Paul omy).
Born 24 January 1907 Economic theory was grappling
Died 20 April 1975 with a controversy dating back to the
beginning of the previous century, but
→Eucken, Hensel’s teacher, had recognised started to deepen during the 1930s: the
the interdependence of the individual elements question was whether a ‘socialist’ econ-
of a social system. On this basis, Hensel made omy based on centrally planned eco-
the analysis of the economic and social systems nomic processes and collectively owned
of the previously ‘socialist’ countries (primari- material means of production could
ly the former German Democratic Republic accommodate rational and conclusive
and Eastern Europe) with their dictatorial, ‘economic calculations’ similar to those
centrally administered economies, the focal familiar with the different forms of the
point of the research programme which was market economy.
linked to his academic post. He was also in These calculations ensure that the
charge of the Institute for Comparative factors of production (labour, land, cap-
Economic Systems, where such systems were ital) that are always scarce and in limit-
Joseph Kardinal Höffner 43
ed supply, are allocated in such a way Marktwirtschaft – Zentralverwaltungswirtschaft,

that they are utilised in a macroeco- Munich.
nomically sensible and thus correct
Gernot Gutmann
manner (→market economy).
In his 1954 postdoctoral thesis,
Hensel contradicted Eucken in his con-
clusion that the abstract model of a cen- Höffner, Joseph Kardinal
trally controlled economy could indeed Born 24 December 1906
contain such a ‘calculation mechanism’. Died 16 October 1987
He was, of course, aware of the fact that
real life socialist economies no more More than anyone else, Höffner embodied the
lived up to such a model than the actu- church’s transition from social romanticism
al market economies lived up to the involving the utter rejection of the modern way
very abstract theoretical model of an of living and working in an industrialised
economy of ‘total competition’. Hensel society on moral grounds, to social reform and
was and remained extremely sceptical active participation in economic organisation
regarding the possibility of realising a in terms of ‘institutional order policy’. Höffner
genuinely effective centrally adminis- was undoubtedly the most influential repre-
tered economic order, and he was clear- sentative of Christian social doctrine: under his
ly vindicated in this by the collapse of guidance, it flourished as an academic disci-
the economic and social systems of pline in a way that was unmatched either
‘socialist’ states later on. before or after. Höffner stressed the ethical sig-
nificance of social institutions, saying that:
ACADEMIC AND PROFESSIONAL CAREER: 1925 ‘History teaches that freedom and human dig-
trained and qualified as a carpenter. 1931 nity largely depend upon the organisation of
successful completion of an exam for the the economy.’ He was a respected political
academically gifted followed by an under- adviser and made a significant contribution to
graduate degree in economics in Berlin and
the idea of subsidiarity anchored in the struc-
Freiburg. 1937 submission of his doctoral
ture of the labour and social systems of the
thesis followed by studies at the London
School of Economics. 1951 post-doctoral
German Federal Republic, while as an aca-
lecturing qualification in Freiburg. 1957 demic teacher he guided a whole generation of
accepts the Chair of Economics at the future decision-makers.
University of Marburg. 1963–1964 dean of
the Faculty of Law and Political Science at Sometimes a person has so many abili-
the University of Marburg, and 1965–1967 ties and talents that even a good 80 years
rector of that university. are not enough to express them to the
fullest. This definitely applies to Joseph
REFERENCES:
Höffner, who was born the son of a
HENSEL, K. P. (1972), Einführung in die Westerwald farmer on Christmas Eve of
Theorie der Zentralverwaltungswirtschaft, 2nd
1906. He had five sisters and, after the
ed, Stuttgart; HENSEL, K. P./ BLAICH,
premature death of his mother, two
F./BOG, I./ GUTMANN, G. (1971), Wirt-
schaftssysteme zwischen Zwangsläufigkeit und step-brothers. During his life, Höffner
Entscheidung, Stuttgart; HENSEL, K. P. managed to play a number of different
(1972), Grundformen der Wirtschaftsordnung. roles in quick succession, and in each
44 Joseph Kardinal Höffner
phase he achieved the sort of ‘excel- behind the social market economy. He
lence’ that is much talked about nowa- was later actively involved in its official
days but for which many lack the nec- acceptance.
essary self-discipline and inner
strength. It cannot have been easy for Höffner the priest
the father to give up his eldest to an aca- Even as a distinguished academic and
demic career; having been prepared for lecturer with his many doctorates,
senior school by the local priest, the Höffner – true to the tradition of
bishop saw to it that he was sent to the Christian social doctrine – did not feel
Gregoriana Papal University to study that pastoral work was beneath him.
theology right after receiving his From 1943–1945 he was the priest in
school-leaving certificate in 1926. charge of the working-class parish of the
Holy Cross in Trier. As a young curate
Höffner the academic in Saarbrücken, he decided to commit
In the years between 1929 and 1941, himself to lifelong abstinence out of sol-
Höffner collected no fewer than five idarity with a group of alcoholics. From
doctorates. He lived in Rome until 1934 March 1943 onwards Höffner kept
(theology, canon law, philosophy), then Esther Sara Meyerowitz, a seven-year-
in Saarbrücken after his time as a curate, old Jewish girl, in hiding under the
and then in Freiburg (theology, eco- assumed name ‘Christa Koch’. This was
nomics). It may seem uncanny that an offence in the National Socialist state
while the Second World War was turn- that, if discovered, would certainly have
ing Europe to ashes all around him, had fatal consequences for a clergyman
Höffner followed his economics degree like himself.
(graduation 1939) with a doctorate
under the reputable economist Walter Höffner, the professor of Christian social
→Eucken, one of the architects of the doctrine
social market economy. Höffner’s thesis Höffner had to wait until the regime of
dealt with ‘Economic ethics and mono- terror had ended before he could
polies in the fifteenth and sixteenth cen- become a professor – first at the semi-
turies’. But the young Höffner certainly nary in Trier, and from 1951 as incum-
did not hide from the horrors of his bent of the renowned chair of Christian
time in the ivory tower of academic pur- Social Sciences in Münster.
suits. The fact that he was able to bridge His time in Münster, which
the academic gap between historic and spanned just over a decade, was of par-
systematic research was a rare feat. It ticular importance in terms of his
was also proof that those who believed impact on the →social market economy.
that devotional Christianity and the Prepared through his research (together
modern world were fundamentally with contemporary teachers such as the
incompatible, were mistaken. Jesuit Oswald von →Nell-Breuning in
In his field, Höffner prepared the Frankfurt and Johannes Messner in
ground for a successful new start for a Vienna), Höffner helped the Catholic
post-war Germany by getting the Church in Germany to overcome its
Church to acknowledge the ideas hostile attitude towards the modern
Reinhard Kamitz 45
economy and society, which had con- REFERENCES:
tributed to its refusal to acknowledge HÖFFNER, J. (1983), Christliche

the Weimar Republic and consequently Gesellschaftslehre, 2nd edition, Kevelaer (new
edition 1999); SCHREIBER, W./DREIER,
to the totalitarian aberrations of the
W. (eds) (1966), Gesellschaftspolitik aus
20th century. Among other things,
christlicher Weltverantwortung. Reden und
Höffner was an academic adviser to the Aufsätze. (Sonderband Institut für
Catholic Employers’ Federation, a Christliche Sozialwissenschaften), Münster
national association that received cru- (2nd Vol. ed v. W. Dreier, Münster 1969);
cial input from him. HECK, E. J. (ed) (1986), In der Kraft des
Glaubens. Ansprachen, Aufsätze u. a. 1969-86,
Höffner, the church leader 2 , Freiburg i. Br.
Höffner became Bishop of Münster in
1962, Archbishop of Cologne in 1969 André Habisch
and a member of the College of
Cardinals as well as president of the
German Bishops’ Conference from Kamitz, Reinhard
1976 until shortly before his death in Born 18 June 1907
1987. Here, too, he was building bridges Died 9 August 1993
between the Church and the modern
economy and society: at the second More than anyone else, it was Kamitz who
Vatican Council, he helped to forge the introduced the concept and the principles of
groundbreaking methodical re-orienta- the ‘social market economy’ in Austria after
tion of the Church in the Council doc- 1945. He began while he was in charge of the
uments (particularly in the pastoral con- Economic Policy Department of the Federal
stitution Gaudium et Spes), in such a way Chamber of Trade and Commerce
that economics and the social sciences (1946–1951), and even more forcefully as
are basically granted autonomy. Finance Minister (1952–1960) and as
In the worldwide organisation of President of the Austrian National Bank
the Catholic Church, too, Höffner was (1960–1968). Taking such a clear stand
working towards a Christian social doc- regarding order policy required considerable
trine that was open to the secular world. courage since the economic policy programmes
Numerous honorary doctorates from of the two large parties, the Österreichische
Asian and Latin American universities Volkspartei (ÖVP) and the Sozialistische
reflect this involvement. Some 2.8 mil- Partei Österreichs (SPÖ), were both greatly
lion copies of his book have been pub- at variance with those of the social market
lished and it has been translated into 12 economy: the ÖVP in the direction of
languages. Christian social and class-related ideas, and
International honours include the the SPÖ in its tendency towards socialist cen-
Orders of Merit from the Federal tral planning concepts (Austromarxism).
Republic of Germany and the Republic
of Italy. Another major achievement Kamitz’s own stance was based on a
was his contribution to the financial combination of the main principles of
consolidation of the previously serious- the social market economy and ordo-
ly indebted Vatican State. liberalism (→liberalism), adapted to
46 Reinhard Kamitz
Austrian conditions. The economic the national borders through the grad-
policy contributions by Kamitz had the ual liberalisation of the former
effect of clarifying the politically con- Organisation for European Economic
fusing concepts about the ‘social market Cooperation, which led to the removal
economy’ to the extent that from the of quantitative trade restrictions for
time when Julius Raab became Federal goods and services. He also approved of
Chancellor and Kamitz became Minis- the regulations of the International
ter of Finance, the emerging economic Monetary Fund for the lifting of all
and social order in Austria was referred exchange restrictions in favour of the
to as a ‘social market economy’. Austrian schilling and the agreements
Kamitz believed in the ‘interde- in the General Agreement on Tariffs
pendence of the systems’ (W. and Trade for the gradual removal of
→Eucken). He also believed that in eco- customs barriers. For these reasons,
nomics, political and cultural liberty are Kamitz wanted to see Austria as an
indispensable. Kamitz brought about active participant in the fledgling
the independence of the Austrian European economic integration,
Central Bank in 1955 and made sure because he was sceptical about whether
that the stability of the currency was its a social market economy with the nec-
supreme goal; furthermore, the fund- essary economic policy consistency
ing of any sort of national organisation could be implemented politically in
was prohibited thanks to his efforts. Austria.
Both goals were also incorporated into Kamitz felt that it would be uneco-
the Treaty of Maastricht in 1992 nomical to fight anti-competitive agree-
(→European Economic and Monetary ments in isolation in the small Austrian
Union) with regard to the European market. He therefore advocated the
Central Bank. Through a number of tax expansion of regional →competition and
reductions which were spectacular at the liberalisation of the movement of
the time, he then succeeded in showing goods and services, as well as monetary
that such steps can increase state rev- and capital exchange.
enue and can act as an incentive for per-
formance and investments. ACADEMIC AND PROFESSIONAL CAREER :
Kamitz had already advocated the 1934–1939 Institute for Market Research,
adoption of these principles during the Vienna; 1938 professor at the World Trade
negotiations on international and mon- College, Vienna; 1939–1946 Chamber of
Commerce Vienna; 1946–1951 Federal
etary relations. For the stabilisation of
Chamber of Commercial Economy, direc-
price levels he considered a competitive
tor of the Department of Economic Policy,
policy which is implemented by the deputy secretary general; 1952–1960 Federal
government but extends beyond Minister of Finance; 1960–1968 President
national borders as the best option – of the Austrian central bank.
more effective than wage and price
agreements between unions and man- Wolfgang Schmitz
agement, and also more effective than
official price control. Kamitz whole-
heartedly agreed with the opening of
Friedrich Karrenberg 47
Karrenberg, Friedrich (1965). In 1950–1961 he was chairman of

Born 1904 the ‘Work and the Economy’ working com-
Died 1966 mittee in the German Protestant Church
Congress; in 1954 he was charged with the
publication of the Protestant Social
Karrenberg’s significance does not primarily
Encyclopaedia (2001, 8th edition). During the
derive from a personal contribution to eco- final years of his life he was an honorary
nomic theory or even from a theological inter- professor at the University of Cologne,
pretation of economic ethics; it rather came where he focused on the history of social
from his active involvement as a mediator ethics.
between church, society and the economy. As
a theological layman, entrepreneur and scien- REFERENCES:
tist he contributed in a variety of ways to KARRENBERG, F. (1959), Gestalt und
attract understanding for the →market Kritik des Westens, Stuttgart; HÜBNER, J.
economy in church circles. At the same time (1993), Nicht nur Markt und Wettbewerb.
he proposed that the economy must be com- Friedrich Karrenbergs wirtschaftsethischer Beitrag
zur Ausgestaltung der sozialen Marktwirtschaft,
mitted to the common good and show social
Bochum; BECKMANN, J./ WEISSER, G.
responsibility. Karrenberg’s powers of persua-
et al (1964), Christliche Gemeinde und
sion went beyond religious denominations, Gesellschaftswandel, Festgabe für F.
party politics and specific belief systems. Karrenberg, Stuttgart, Berlin.
Already in his dissertation on ‘Christianity,
Capitalism and Socialism’ in 1933, he took
a determined stand against the conservative Martin Honecker
Lutheran worship of the state. This – togeth-
er with the equally important affirmation of
individual liberty in Christian responsibility Lutz, Friedrich August
– forms a common bond between all the spir- Born 29 December 1901
itual representatives of the →social market Died 4 October 1975
economy whose rootedness in the Christian
human ideal has always been emphasised. When Lutz started his undergraduate studies
in political economy in 1920, the Historical
ACADEMIC AND PROFESSIONAL CAREER : School was dominating the subject at the
During the post-war era and the rebuilding German universities. But it had nothing par-
of Germany, Karrenberg was an independ- ticular to offer in relation to the galloping cur-
ent entrepreneur predominantly active in rency depreciation of the post-war period.
the Rhineland. He had numerous honorary
Lutz found that, like himself, the young assis-
posts in the Protestant Church, where his
tant professor Walter →Eucken, was
functions included that of a part-time mem-
ber of the administrative body of the
inclined to examine a problem theoretically in
Protestant Church and where he acted as order to uncover its true causes and the under-
chairman of the Committee for Social and lying economic facts. The acquaintance with
Ethical Questions of the Protestant Church Eucken made a profound impression on
in the Rhineland. He published significant Lutz. It was Eucken who made him leave his
socio-political statements during the 1940s job to become an assistant in Freiburg and
and 1950s. He founded and was in charge of embark on an academic career. This is how
the Institute for Social Sciences in Velbert Lutz gained access to the inner circle of the
48 Friedrich August Lutz
ordo-liberal Freiburg School which was gath- ing currency depreciation, whose ever-
ering around Eucken. Under National changing causes he managed to bring to
Socialist rule, when Lutz’s career at German light time and again. After an accurate
universities was blocked because of his liberal analysis of the facts he always managed
outlook, he emigrated to the United States, to get to the fundamental institutional
the country leading the way in contemporary order policy questions before working
theory. He returned to Europe soon after the out proposed solutions.
Second World War. Lutz was a leading proponent of the
opinion that a competitive economy
Lutz’s dedication to research was leg- not only depends on the free interna-
endary. His fields of research were inter- tional exchange of goods and capital,
est theory, monetary theory and interna- but that it will work properly in the
tional currency systems. In the same long term only if the purchasing power
way as for Eucken, his teacher, theories of the currency remains stable. Lutz felt
were never an end in itself for Lutz, but that it was wiser not to leave it to the
rather a means for an understanding of whims of the politicians to look after
economic reality. A clear rational mind the stability of the currency, but that the
and the incorruptibility of its judgment necessary regulations should be incor-
earned him the respect of his academic porated into the monetary and currency
colleagues. Instead of spoon-feeding his system.
students, he trained them in getting to Long before the international
the bottom of a problem step-by-step. Bretton Woods post-war monetary sys-
Lutz never came across as superior tem led to worldwide inflation and col-
because he saw himself as someone who lapsed, Lutz had advocated flexible
was always learning. This made him a exchange rates. His view was that in a
genuine teacher who led by example. world prone to inflation, only flexible
Apart from its efforts to gain an exchange rates make it possible for an
understanding of the way an economy individual country to commit its eco-
functions, the Freiburg School sought nomic policy to the goal of →price level
to work out the details of the economic stability.
and legal prerequisites of a competitive
economy free of power blocs. Lutz was ACADEMIC AND PROFESSIONAL CAREER :
especially productive in the field of 1920–1925 undergraduate and postgraduate

money and currency systems, where he studies of Economics and Political Sciences
in Heidelberg, Berlin and Tübingen (Dr.
acquired the reputation of being one of
rer. pol. – Doctor in Economics); 1926–
the top experts.
1929 Association of German Mechanical
In numerous shorter essays he dealt Engineering Institutions in Berlin;
with problems of his time: the collapse 1929–1932 assistant to Prof. Walter Eucken
of the gold standard, the bank crisis of in Freiburg; 1932–1938 assistant professor at
the early 1930s, the obstruction of the the University of Freiburg; one year in
international goods and payment trans- England and one year in the United States
actions through exchange controls, the on a Rockefeller Fellowship; 1938–1953 lec-
balance of payments equilibrium of the turing post at Princeton University (New
post-war period and above all the ongo- Jersey), US, from 1947 as full professor;
Fritz W. Meyer 49
1948–1952 visiting professor at the cal compromises might force him to

University of Freiburg; 1953–1972 profes- deviate from his theoretical convictions.
sor at the University of Zurich. He rather saw it as his task to provide
economic policy with useful concepts,
REFERENCES:
and his participation in numerous advi-
LUTZ, F. A. (1936), Das Grundproblem der
Geldverfassung, Stuttgart, Berlin, printed in:
sory committees gave him the opportu-
Lutz, F. A. (1962), Geld und Währung, nity to do just that. It was the combina-
Gesammelte Abhandlungen. Tübingen; — tion of his academic approach, where
(1956/1967), Zinstheorie, Zurich, Tübingen; diagnosis and therapy were inseparably
— (1971), Politische Überzeugungen und nation- linked with the incorruptible clarity of
alökonomische Theorie, Zürcher Vorträge, his thinking, writing and arguing, that
Tübingen (with bibliography). enabled him to come up with outstand-
ing and at times pioneering insights.
Verena Veit-Bachmann The topics Meyer worked on cover
a wide area, but he always reserved a
particular interest for international
Meyer, Fritz W. trade relations, labour and development
Born 8 November 1907 policies as well as currency problems.
Died 4 March 1980 His notable publication on The
Reconciliation of the Balance of Payments,
The Freiburg Circle had a formative influ- which appeared in 1938, still offers a
ence on Meyer as an academic. His research definitive analysis which cannot be
was crucial for the development and consoli- ignored by anyone who is looking for a
dation of institutional order theory and pro- practically applicable theoretical back-
vided a firm foundation for institutional order ground to balance of payments–related
policy. As a disciple of Walter →Eucken, problems.
Meyer developed a burning interest in Beyond that, it was above all specif-
→institutional order policy which stayed ic institutional order policy issues
with him throughout his academic career. The which challenged and fascinated him
tangible result of this was a number of com- again and again. For Meyer, it was an
pelling investigations and analyses of the sub- important economic policy objective
ject. They have repeatedly been made avail- and a compelling task to clarify the basic
able in publications, giving lasting testimony structure of the market system, but also
to the lucidity of the language and the apt to examine the elements forming such
examples and explanations which characterise an economy. In his investigations of
his style. pressing economic problems, Meyer
was masterful in that he was able to
Meyer was able to look back on a long reduce a problem down to fundamental
and successful career at the University economic principles and, at the same
of Bonn, where he remained despite time, to show how it related to institu-
being offered many prestigious aca- tional order policy. In his critical analy-
demic positions. He also turned down ses, he was as ruthless in uncovering
senior positions in government because cases of self-centred lobbying as he was
he saw the danger that inevitable politi- with the stubborn tendency to →inter-
50 Leonhard Miksch
ventionism and restraints of competition, name Leonhard Miksch is frequently over-

which he exposed with brilliant logic looked. His premature death notwithstand-
and wit as economically unfounded and ing, he made an important contribution to the
unacceptable. rebuilding of the fledgling Federal Republic,
both in his role as a university teacher and
ACADEMIC AND PROFESSIONAL CAREER :
Undergraduate studies in Economics; 1934 through his hands-on involvement in eco-
doctorate with Walter Eucken; 1934–1937 nomic policy.
assistant at the Institute for World Economy
in Kiel and with Eucken in Freiburg; 1938 In terms of his career development,
post-doctoral degree with Eucken; Miksch differs substantially from his
1938–1943 lecturer at the University of ordo-liberal fellow combatants. After
Kiel; 1946 assistant professor, 1948 full pro- initially studying chemistry, he
fessor at the University of Bonn; 1950 changed to political economics and
member of the Scientific Advisory Council graduated in economics in Tübingen in
at the Federal Ministry of Economic Affairs;
1926, completing his doctorate three
1962–1965 member of the Council of
years later. Walter Eucken, who
Experts for the Investigation of Economic
Development; 1973 professor emeritus.
remained a life-long friend, was his
supervisor. But instead of embarking
REFERENCES: on an academic career, Miksch started
MEYER, F. W. (1938), Der Ausgleich der working as a journalist for the
Zahlungsbilanz, Jena; —, many articles in: Frankfurter Zeitung in 1929, where he
Ordo Jahrbuch für die Ordnung von Wirtschaft was chief economics editor until the
und Gesellschaft; Weltwirtschaftliches Archiv; newspaper was closed down by the
Wirtschaftspolitische Chronik des Instituts
National Socialists in 1943.
für Wirtschaftspolitik der Universität zu
Miksch’s career in journalism did
Köln, in several anthologies; for a lengthy
evaluation of his scholastic achievements
not prevent him from writing his most
see, WILLGERODT, H. (1981), Fritz important work in 1937, entitled
Walter Meyer, Ordo, 32, pp. 199-217. ‘Competition as Responsibility –
Principles of a Competitive System’,
Helmut Gröner which he later submitted as his post-
doctoral thesis.
After the end of the Second World
War, Miksch was actively involved in
Miksch, Leonhard the rebuilding of the German economy,
Born 20 May 1901 and until his appointment to the
Died 19 November 1950 Business College in Mannheim and the
University of Freiburg, he was head of
Ordo-liberalism and the Freiburg School are department at the Economic Adminis-
most closely associated with names like Walter tration in Frankfurt. During this time,
→Eucken, Franz →Böhm and Alfred he was to become one of Ludwig
→Müller-Armack, who for good reason →Erhard’s closest confidants and advis-
count among the most outspoken representa- ers. It was thanks to Miksch that the
tives of this particular variety of economic pol- 1948 currency reform was embedded
icy. It is unfortunate that in this context the into an adequate framework of institu-
Leonhard Miksch 51
tional order policy and was thus a suc- at producing, through appropriate insti-
cess. The so-called ‘Guiding Principles tutional measures, a market result
Law’, on which Erhard based his waiv- equivalent to the result which one
er of price controls which came into would expect under →competition. Thus
force simultaneously with the currency Miksch advocated neither the absolute
reform and without which a free com- prohibition nor the nationalisation of
petitive system would not have been monopolies, but he endorses incentive-
possible, had largely been drawn up by oriented governmental regulations,
Miksch. Miksch died on 19 September such as they have been implicitly
1950, only six months after his great implemented today by the regulatory
supporter and friend, Walter Eucken, in authority for the postal service and
Freiburg. telecommunications.
As has been mentioned before, The arbitrary use of power by the
Miksch clearly belongs to the ordo-lib- state, however, can be contained by
eral tradition of the Freiburg School. democratic majority decisions. Miksch
Like Eucken and Böhm, he was not try- even came to the conclusion that
ing to promote a laissez-faire type of democracy and the market economy are
competitive policy or a policy which mutually interdependent. A liberal eco-
keeps aloof from economic processes. nomic system presupposes a stable
Instead, he developed a kind of ‘rule of democratic system, while the market
thumb’ on the basis of which adequate economy helps prevent the ‘dictator-
sets of rules (meaning an officially ship of the bureaucracy’, thereby rein-
enforceable institutional framework), forcing democracy.
can be assigned to the different types of
markets. This would imply that a ACADEMIC CAREER: 1920–1926 undergradu-
monopoly would have to be subjected ate studies in Chemistry and Political

to government control, while a market Economy in Prague and Tübingen. 1929
which subscribes to complete competi- receives his doctorate in Economics at the
University of Tübingen. 1937 post-doctoral
tion does not require any intervention.
qualification. 1949 professorship at the
Miksch calls this laying down of an
National Business College in Mannheim
institutional framework, ‘external coor- and at the University of Freiburg.
dination’. The procedural counterpart,
however, is referred to as the ‘internal REFERENCES:
coordination’. While internal coordina- MIKSCH, L. (1937), Wettbewerb als Aufgabe.
tion depends on the free will of the mar- Grundsätze einer Wettbewerbsordnung, Stuttgart,
ket participants and their assessment of Berlin, 2nd revised edition, Godesberg 1947;
mutual benefit, external coordination is — (1948), Die preispolitischen Grundge-
always an expression of power. danken, in: Miksch, L./Rubrath, W., Die
In order to prevent this power from Preisfreigabe. Wirtschaftspolitik und Recht,
Siegburg, pp. 3-18; — (1949), Die
being used arbitrarily by private indi-
Wirtschaftspolitik des ‘Als-Ob’, Zeitschrift für die
viduals, which can happen through
gesamte Staatswissenschaft, 105, pp. 310-338.
monopolies, Miksch developed the
model of ‘competition as-if ’. He felt Heinz-Dieter Smeets
that competitive policy must be aimed Michael Sket
52 Alfred Müller-Armack
Müller-Armack, Alfred of this premise, one topic runs through

Born 28 June 1901 Müller-Armack’s work like a thread:
Died 6 March 1978 the significance of social value orienta-
tions and whether there is a readiness to
assume the responsibility for their real-
isation.
His work on Economic Control and
Market Economy, published in 1946,
encapsulates his core concept of what a
social market economy should be. It
was also the first time Müller-Armack
developed the idea of a market econo-
my with social responsibility. Here, and
in his subsequent writings, the →social
market economy was conceived as an eco-
nomic style which must be able to adapt
to changing social conditions over time.
However, this adaptive ability should
not clash with the abiding fundamental
principle of the social market economy,
which for Müller-Armack consists of
the fusion of the precept of a free mar-
Müller-Armack prepared the ground for the ket with that of social compensation.
concept and coined the term social market From the perspective of →social iren-
economy. He regarded the implementation of ics propagated by Müller-Armack, the
a liberal and humane political system as a social market economy comes across as
societal task, to which in its practical form the a social idea greater than any specific
economy had to contribute. belief system, built on the principles of
economic institutional order theory and
Müller-Armack was prolific in his aca- unmistakably characterised by the coor-
demic work. In his writing, he used dination inherent in a market economy.
→business cycle policy – one of the hall- Having clarified this, he goes on to
marks of the social market economy – point out that, for him, the social mar-
as his point of departure, while his ket economy is not a →third way
socio-cultural and socio-religious between a →market economy and central-
works of the 1930s and early 1940s ly administered economy (→socialism/
were inspired by Max Weber, among planned economy), but that he sees it as a
others. This awakened his interest in special type of market economy with an
investigating economic styles. added, inalienable social quality.
According to Müller-Armack, it is Both through his political activities
attitudes, value judgments and power and his academic work, Müller-Armack
positions rather than immutable natural has earned lasting recognition. In the
laws which shape the different eco- field of institutional order theory and
nomic and social systems. On the basis policy, his concept of a social market
Oswald von Nell-Breuning 53
economy has perpetually stimulated ister; Müller-Armack withdrew from this

deeper reflection. To commemorate position in 1963, continuing in his universi-
what would have been his 100th birth- ty teaching post until 1969. He remained
academically and socially active until his
day in 2001, academic symposiums in
death, something which was reflected in the
Bonn and Leipzig provided an opportu-
plethora of tributes he received.
nity for his colleagues, students and the
experts on his theory both in Germany SELECTED PUBLICATIONS BY ALFRED MÜLLER-
and abroad to honour the memory of ARMACK:
Alfred Müller-Armack. Wirtschaftsordnung und Wirtschaftspolitik.
Studien und Konzepte zur Sozialen Markt-
ACADEMIC AND PROFESSIONAL CAREER : wirtschaft und zur Europäischen Integration,
Müller-Armack’s academic career started Bern, Stuttgart, 2nd edition, 1976; Diagnose
with a degree in Political Economy at the unserer Gegenwart. Zur Bestimmung unseres
universities of Giessen, Freiburg, Munich geistesgeschichtlichen Standortes, Bern, Stuttgart,
and Cologne. 1923, doctoral thesis under the 2nd revised edition, 1981; Genealogie der
supervision of Leopold von Wiese at the Sozialen Marktwirtschaft. Frühschriften und
University of Cologne (‘The Crisis in Social weiterführende Konzepte, Bern, Stuttgart, 2nd
Economic Theory’); 1926, post-doctoral revised edition, 1981; Religion und Wirtschaft.
thesis (‘The Economic Theory of Economic Geistesgeschichtliche Hintergründe unserer
Stabilisation Policy’). 1926–1938 assistant Europäischen Lebensform., Bern, Stuttgart, 3rd
lecturer and assistant professor in Cologne. edition, 1981.
After standing in for another lecturer at the
University of Münster in 1938, he became REFERENCES:
assistant professor there the following year, DIETZFFELBINGER, D. (1998), Soziale

before being appointed full professor of Marktwirtschaft als Wirtschaftsstil. Alfred Müller-
Political Economy and Cultural Sociology Armacks Lebenswerk, Gütersloh; MÜLLER,
with particular emphasis on the sociology of E. (1997), Evangelische Wirtschaftsethik und
religion in 1940. Concurrently, Müller- Soziale Marktwirtschaft, Neukirchen-Vluyn;
Armack was acting director of the Institute WATRIN, Ch. (1988), Alfred Müller-
for Economics and Social Sciences in Armack (1901 to 1978), in: Henning, F.-W.
Münster. This is where, in 1941, he co- (ed), Über den Beitrag Kölner Volkswirte und
founded a research department for general Sozialwissenschaftler zur Entwicklung der
and textile industry issues in the market Wirtschafts- und Sozialwissenschaften, Cologne,
economy. 1948 founder member of the Vienna, pp. 39-68.
scientific advisory committee at the Trade
and Commerce Administration in Friedrun Quaas
Frankfurt. 1950 Leopold von Wiese’s succes-
sor at the University of Cologne. The
Cologne Institute for Economic Policy in Nell-Breuning, Oswald von
1950/51 was basically established thanks to Born 8 March 1890
Müller-Armack’s initiative. 1952–1958
Died 21 August 1991
Müller-Armack combined his professorship
with the post of acting head of the depart-
ment for basic guidelines at the Federal Oswald von Nell-Breuning was very critical
Ministry of Economics. 1958 Secretary of in his comments both on neo-liberalism as the
State for Europe in the Federal Ministry of theoretical background and what he liked to
Economics under Ludwig →Erhard as Min- refer to as the ‘so-called‚ social market econo-
54 Oswald von Nell-Breuning
my’ as its practical derivative, at least during the practice of destructive individualist
its initial phase during the 1950s (see ‘Neo- theories’ (QA 88)? This is precisely
Liberalism and Catholic Social Doctrines’, what was also important to the ‘fathers’
1955). It was not until much later (‘Is there of the social market economy, and even
common ground between Neo-Liberalism today its proponents make this very
and Catholic Social Doctrines?’, 1975), with claim.
reference to a contribution by Franz
→Böhm (Ordo 24, 1973, pp. 11-84), that The ‘genuine’ regulatory principle
he signalled a conditional chance for reconcil- The core issue in the controversy
iation. between Nell-Breuning and certain
neo-liberal representatives of the social
In order to be able to understand this market economy – particularly that
position, one has to go all the way back political persuasion in Germany which
to the origins of the encyclical has made reference to the social market
Quadragesimo Anno (QA, 1931); Nell- economy since 1949 – is really this
Breuning considered himself to be one ‘genuine’ regulatory principle. In his
of its ghost writers. There, Pope Pius XI critical statements, Nell-Breuning fre-
submits ‘capitalist economies’, and quently repeats his suspicion that
most particularly their ‘empowerment despite all their protestations to the
as a result of freedom of competition’ contrary, the neo-liberals regard →com-
(see QA 105-109) to strong criticism petition as the chief ‘regulatory’ principle
while conceding at the same time that it because their ‘neo-Kantian’ theory of
is ‘not to be condemned as such’ (QA knowledge leaves them no alternative.
101). According to him, ‘freedom of He claims that for the neo-Kantians,
competition within certain limitations the (economic) common good is only a
is justified and of undoubted use’, but ‘regulatory idea’ devoid of a priori mate-
cannot be allowed to become the ‘regu- rial content. This means that they are
latory principle of an economy’. In his only able to correct the outcome of
view, competition cannot bring about competition in retrospect, while com-
economic ‘self-control’ because: ‘Power petition itself is given free reign. Nell-
is blind – force is tempestuous’. In Breuning argues that this comes down
order to be ‘beneficent to mankind, it to the familiar ‘old-liberal’ theory,
needs vigorous restraint and wise which is simply dressed up with the
supervision’. This has to be imposed label ‘social market economy’.
from outside with the help of ‘higher The social content of the social mar-
and nobler forces ..., which discipline ket economy in its practical, political
economic power sternly but with wis- application as part of the economic and
dom: →social justice and social love’. social policies of Ludwig →Erhard and
Thus, for Pius XI as well as for Alfred →Müller-Armack did not go far
Nell-Breuning, the crucial question is: enough for Nell-Breuning. Parameters
‘How can the economy once again be of his criticism were above all industri-
subordinated to a genuine and thor- al relations (Nell-Breuning was a pro-
oughly regulatory principle’, after in the ponent of ‘labourism’, according to
liberal capitalism of the past it ‘allowed which shareholders, staff and manage-
Oswald von Nell-Breuning 55
ment are supposed to be represented on demands of morality’, one has to turn to

the corporate supervisory boards in the ‘market economy which remains
equal numbers), and the distribution of functional while placing lower expecta-
the productive capital which in his tions on morality’. Böhm apparently
opinion was insufficient. To that extent, agreed to this statement with the
Nell-Breuning was closer to the remark: ‘The market economy repre-
German trade unions and the Social sents less temptation for man’ (all quota-
Democratic Party (SPD) than to the tions 469 f.).
Christian Democratic Union (CDU), This basically meant that Nell-
and he participated as much in the Breuning accepted Adam Smith’s ‘para-
drawing up of the SPD Godesberg digm change’ (Karl Homann) accord-
Programme as he made contributions ing to which the institution market rep-
to the magazine Die neue Gesellschaft, resents the ‘inherent morality’ in the
which touted the SPD party line. economic system, which achieves its
ethical goals as an institution and not
Conditional reconciliation due to the personal (high) moral quali-
But what would a ‘true’ social market ty of the market participants (competi-
economy look like, to which Nell- tors). This, however, is only a necessary,
Breuning would gladly give his and not by any means sufficient, condi-
approval? This term is found in the tion of a social market economy
commemorative publication for Franz because, for Nell-Breuning, competi-
→Böhm on his 80th birthday (1975) in tion is ‘not the regulatory principle of
his most important and final essay on the market economy’, but (only) a
this question. ‘peculiar regulatory instrument’ (1968 –
He mentions his ‘personal recollec- see QA 88).
tion’ of a meeting of the ‘academic advi- In anthropological terms, the mar-
sory council of the current Adminis- ket economy is a consequence of ‘pri-
tration for the Economy’ in 1948, vate autonomy’ and the associated
chaired by Franz Böhm, where the ‘removal’ of ‘obstacles’ which might
question ‘what economic order was to prevent its expression (ibid).
take the place of the war economy Since private autonomy can ‘degen-
which had by then collapsed complete- erate’ to the point of ‘the complete
ly?’ was discussed. destruction of the market economy’
A centrally administered economy (468), a ‘market economy requires an
‘expects every individual to go against institutional order policy’ to even be
his own self-interest almost all the time able to keep the ‘cultivated plant’
for the benefit of the common good’. (Böhm) market alive. The market as
Conversely, it applies ‘that in the mar- such only knows ‘one category of values’,
ket economy, self-interest and the which, in accordance with the principle
requirements of the common good are of a rational economy leads to the
largely compatible’. Since ‘morality is ... maxim: ‘Minimise costs, maximise
the scarcest of all the goods which are in profit’ (463). Therefore, to opt for a
scarce supply’, and since the centrally market economy is nothing more than
administered economy makes ‘excessive ‘an intelligence test’ (464).
56 Oswald von Nell-Breuning
The market has a value-based ‘con- omy on another path’ than the one where
trol function’ insofar as the market par- market forces are left to themselves’
ticipants have to react appropriately to (467).
the ‘scarcity conditions which are sig- A summary of Nell-Breuning’s atti-
nalled by the prices’. However, ‘private tude to the social market economy
autonomy’ with the market as a neces- must emphasise three main aspects:
sary regulatory instrument does not lead
‘so easily ... to an ordered economy’ • Nell-Breuning is deeply opposed to
(465). In order to achieve that, ‘a regula- the alleged ‘self-control’ of the econ-
tory policy which ensures both execution omy by a ‘hypostatisation’ of the mar-
and control’ is needed (469). ket, which is no more (but also no
The anthropological basis for this is less) than a regulatory instrument,
the ‘meaning’ of an economy. It is not which, however, is an inevitable con-
only supposed to provide the market sequence of human autonomy.
participants ‘with purchasing power ...,
but everybody alive, for no other reason, • Nell-Breuning warns particularly
than because they are alive’, as Nell- against the ‘agglomeration of exces-
Breuning approvingly quotes F. Böhm sive private power’, which has a
(461). destabilising effect on the ‘minimal
For Nell-Breuning, this means that market equilibrium of functional pri-
a ‘true’ social market economy must vate autonomy’ and which must lead
not be reduced to the bare bones of to the degeneration of the →market
government-secured competition, but economy. (468).
that the economy as a whole must be
regulated and organised in accordance • For Nell-Breuning, the social market
with ‘a world of multidimensional economy necessitates a →social state
human values’ (463). The market, with built-in redistribution and
which is like an ‘illicit worker’ (Böhm), structural policies. This is supposed
must not control the economy ‘exclu- to fulfil optimally the true objective
sively’, but one must include ‘the possi- of the economy, i.e. supplying all
bility of correcting state interventions’. men/women with ‘the basic necessi-
Besides the guarantee of private ties of life’ (461).
autonomy, they particularly consist of
‘private property’ and the ‘freedom of Nell-Breuning’s last word on the
contract’, and the procurement of subject is that if this view of the social
financial means (taxes, duties), through market economy is ‘authentic neo-lib-
which the government interferes with eralism’, ‘then, and only then, are neo-
‘the free income distribution of the liberalism and the Catholic social doc-
market economy’. They also include trines reconciled with one another’
the ‘monetary order which is anything (469).
but automatically controlled’, econom- The question remains, however,
ic stabilisation and structural policy. whether such a reconciliation would
According to Nell-Breuning, it is par- have been possible not only with the
ticularly the latter which puts ‘the econ- ideas of Franz Böhm, but also (even
Hans Carl Nipperdey 57
before 1975) with Alfred →Müller- by the principle of the social state in terms of
Armack and others who were disap- Articles 20(1) and 28(1) of the Basic Law,
pointed by Nell-Breuning’s critical atti- and which is modified into the social market
tude towards the theory and practice of economy, had to be seen as a constitutional
the social market economy which they principle inherent in the fundamental rights,
represented. above all the general freedom of action (Article
2(1) Basic Law), freedom of occupation
ACADEMIC AND PROFESSIONAL CAREER : (Article 12(1), Basic Law), freedom of associ-
From 1928, Dr theol., Dr rer. h. c. (honoris ation and coalition (Article 9(1) and (3,)
causa) Nell-Breuning was professor of Basic Law) and the guarantee of property
Moral Theology and Social Sciences at the
(Article 14(1), Basic Law). However,
College for Philosophy and Theology at St.
Nipperdey’s opinion was not universally
Georgen in Frankfurt. He was a member of
the Scientific Advisory Council at the
accepted, since the Federal Constitutional
Federal Ministry of Economics for 17 years, Court and the greater part of the literature were
as well as an honorary citizen of the cities of presupposing that the Basic Law was neutral
Trier and Frankfurt. as far as the legal aspects of the economic consti-
tutional framework were concerned.
REFERENCES:
NELL-BREUNING, O. v. (1955), Nipperdey’s extensive academic work,
Neoliberalismus und katholische Sozial- for which he received numerous hon-
lehre, in: Wirtschaft und Gesellschaft heute III ours both in Germany and abroad, is
Zeitfragen 1955-1959, Freiburg 1960, pp. 81- reflected in over 400 publications. He
98; — (1956), Die soziale Marktwirtschaft im
was involved in all areas of civil, com-
Urteil der katholischen Soziallehre, pp. 99-102;
mercial and economic law, in copyright
— (1975), Können Neoliberalismus und
katholische Soziallehre sich verständigen?, and competition law as well as in labour
in: Sauermann, H./Mestmäcker, E.-J. (eds), law.
Wirtschaftsordnung und Staatsverfassung (Anni- But Nipperdey also made a signifi-
versary publication on Franz Böhm’s 80th cant contribution to the establishment
birthday), Tübingen, pp. 459-470. of a constitutional framework in these
areas. During his Weimar period, he
Lothar Roos published the compendium The Reich
Constitution and its Basic Rights and
Obligations. It contained his commen-
Nipperdey, Hans Carl tary on the right of coalition in terms of
Born 21 January 1896 Article 161 of the Weimar Reich
Died 21 January 1968 Constitution.
After the Second World War,
In Nipperdey’s opinion, the Basic Law, Nipperdey, Scheuner, Neumann and
although it contains no special section on the Bettermann co-published the Manual
economic constitutional framework, incorpo- on the Theory and Practice of the
rates basic economic, constitutional and legal Fundamental Rights, which included his
principles which in their entirety guarantee the work on the topics ‘human dignity’ and
system of the social market economy. He felt ‘free personal expression’. Particularly
that the market economy, characterised as it is his views on the third-party effect of
58 Hans Carl Nipperdey
fundamental rights in civil law and the Dictated Contract’). There he became assis-
constitutional guarantee of the →social tant professor in 1924. 1925 Chair of Civil
market economy received a great deal of Law, Trade and Commercial Law and
Industrial Law at the University of Cologne
attention both in the literature and in
as a full professor. Despite numerous offers
the jurisdiction, and have retained their
from other universities, he remained loyal
validity to this day. to this university until the end of his life. In
Nipperdey’s comments on the legal 1954, he was appointed the first president of
content of the economic constitutional the newly established Federal Labour Court
framework in the Basic Law are equally at Kassel. He retired from judicial office in
still relevant today, in that they explicit- 1964 at the age of 68, but continued as a lec-
ly state that the neutrality of the Basic turer and researcher at the University of
Law is not absolute to the extent that Cologne even after his retirement, just as he
the government is free to adopt one of had continued to do while in judicial office
the types of a centrally administered in Kassel.
economy or turn to planned economic
REFERENCES:
coordination (→socialism/planned econo-
Comprehensive supporting documentation
my) at will.
compiled by REICHENBERGER, K.
In actual fact, the fundamental (1965), Festschrift für H. C. Nipperdey zum 70.
rights which have economic and legal Geburtstag, 2, Munich, Berlin, pp. 937ff.;
relevance impose boundaries on the NIPPERDEY, H. C. (1954), Die soziale
legislature, while establishing a basic Marktwirtschaft in der Verfassung der Bundes-
decentralised structure of competencies republik, volume 10 of a series of publica-
within the economy, making it indeed tions for the Juristischen Studiengesell-
possible to regard the fundamental schaft, Karlsruhe; — (1965), Soziale Markt-
rights as instrumental in the establish- wirtschaft und Grundgesetz, 3rd edition.
ment of this economic system.
Hans-Jürgen Papier
Nowadays, the EC Treaty (in particular
Article 4(1)) contains a declaration of
the principle of a →competition-based Röpke, Wilhelm
→market economy, so that at the level of Born 10 October 1899
the European Community at least, a Died 12 February 1966
solid legal framework secures the mar-
ket economy. Röpke is in no doubt that the framework of a
→social market economy must include
ACADEMIC AND PROFESSIONAL CAREER : the law, the state, customs and morals, firm
Nipperdey was the son of a general practi- convictions about norms and values and a
tioner. After graduating from high school in reliable monetary system that is not dependent
Weimar, he took up law at the universities of
on the automatism of the market, but for
Heidelberg, Leipzig and Jena. Having been
which the central bank and the government
a volunteer in the First World War, he
received his doctorate in 1917 (‘Limitations
have to take responsibility on a daily basis.
to Extortion by Threat, with Particular Then there have to be economic, social and
Reference to Industrial Action’). He was financial policies which are ‘beyond the mar-
awarded his post-doctoral qualification in ket’ and balance interests, protect the weak,
Jena in 1920 (‘Contracting Obligation and limit power, impose rules and monitor their
Wilhelm Röpke 59
keep striving for solutions which are appropri-

ate for their time in order to make the funda-
mental principles of the ‘social market econo-
my’ a reality.
For Röpke, economics was always polit-

ical economics. In his opinion, the eco-
nomic reality of his time was politicised
to an extent that was previously unheard
of or completely inconceivable. This
view was borne out by Röpke’s own
experiences. As early as 1931, as a mem-
ber of the Reichs Commission for the
investigation of the unemployment
issue (the Brauns Commission), Röpke
suggested that the private initiative
which, for a host of reasons was lacking,
should be replaced by suitable govern-
observance. The capital market, investments ment-financed demand for the purpose
and foreign trade are the key areas and they of giving the economy a boost. He
must not be distorted by government interfer- argued that economic activity could be
ence in the market process. The individual kick-started by giving it an ‘initial push’,
principle that lies at the heart of the market and that in this way →unemployment
economy has to be kept in balance by the could be gradually diminished.
social and humanitarian principles that char- As early as 1923, Röpke was trying
acterise the framework and its different ele- to communicate the need for an ‘inno-
ments. The will to justice generates a ‘concept vative’ synthesis of ‘liberalism, social
of liberty’, affirming solidarity as a basic responsibility and loyalty towards the
value. Part of this is an adequate share in the law’. In this way, he felt that the two
national income for everyone. In this way, extremes of laissez-faire on the one
gross inequalities in the manner in which the hand, and the exclusive focus on the
national income and the national capital are common good on the other could be
distributed can be balanced. avoided.
Röpke refers to his economic ideal as ‘eco- No intelligent individual could
nomic humanism’ or the ‘third way’. The deny the fact that the Western
theory behind his economic policies is based on economic system with its characteristic
the postulate that human dignity is sacrosanct. features including private ownership of
He wants to create a social and political envi- the means of production, highly differ-
ronment where respect for human rights is the entiated levels of production and a long
first essential. The proponents of a liberal state list of individual liberties was particu-
should see Röpke’s work as a beacon, a civi- larly suited to the creation of prosperity.
tas humana ‘beyond supply and demand’. To abolish these liberties in order to
He wants science, politics and the public overcome the ‘late capitalist’ system
always to be reminded of the fact that one must seemed to Röpke tantamount to con-
60 Wilhelm Röpke
sciously ushering in a ‘totalitarian state’ he returned to Marburg as professor of

or a political dictatorship. Röpke cau- Political Economics (1929). He remained
tioned against the National Socialist there until he was dismissed by the Hitler
regime in 1933 for political reasons. From
promise of a ‘new, grandiose, but other-
late-1933 until the winter semester of
wise nebulous 1000-year empire’ and
1937/38, he was director of the Institute for
the consequences of the political hyste- Social Sciences at the University of Istanbul,
ria that was a symptom of the time. He before taking up a professorship of
insisted that national socialism was a International Economic Affairs at the Institut
radical ideology incompatible with a Universitaire des Hautes Etudes Internationales
liberal state. Röpke predicted that on in Geneva, where he remained until his
top of the economic crisis, Germany death.
would be plunged into a political crisis
and that everybody who gave his vote to REFERENCES:
the National Socialists would be voting RÖPKE, W. (1944/1979), Civitas humana:

for ‘chaos instead of order and for Grundfragen der Gesellschafts- und
Wirtschaftsreform, 4th edition 1979, Bern,
destruction instead of construction’.
Stuttgart; — (1958/1979), Jenseits von Angebot
When Röpke opted for emigration
und Nachfrage, 5th edition 1979, Bern,
in 1933, his decision was prompted by Stuttgart; TUCHTFELDT, E./WILLGE-
the desire to remind the rest of the RODT, H. (1937/1994), Wilhelm Röpke –
world that there was still ‘another Leben und Werk, in: Röpke, W., Die Lehre
Germany’ (for example, the Freiburg von der Wirtschaft, Bern, Stuttgart, Vienna,
Circle with members like Franz 13th edition 1994; HAMM, W./
→Böhm and Walter →Eucken). He was KRÜSSELBERG, H.-G. et al (1999), sever-
drafting an economic and social order al contributions in: Ordo, 50, Stuttgart.
for the post-National Socialist era,
based on the idea of a society where Hans-Günter Krüsselberg
economic equilibrium is linked to the
postulates of social justice and equality,
and which is ‘aware of the significance Rueff, Jacques
of moral values for the socio-economic Born 23 August 1896
survival of the nations’. These are the Died 23 April 1978
words Ludwig →Erhard used on
Wilhelm Röpke’s 60th birthday to As a French political economist, a financial
highlight the significance of his think- expert and a politician in the fields of finance
ing for the development of the concept and economic affairs, Rueff combined, like
of the social market economy. almost no one else, innovative contributions to
economic theory with a successful activity in
the practical economic policy and public
Undergraduate degree in economics in
administration. He influenced the French
Göttingen, Tübingen and Marburg.
monetary and economic policy more strongly
Doctorate (1921) and post-doctoral qualifi-
cation, then assistant lecturership in Political than any other academic or politician. Rueff
Economics in Marburg (1922). After always advocated a liberal economic system
appointments to Jena as assistant professor and a liberal economic policy, even at times
(1924) and to Graz as full professor (1928), when this was not popular. With his theory of
Jacques Rueff 61
property rights, his battle against inflation, his theme for Rueff ’s practical work on
criticism of the application of the gold standard economic policy. Already in 1926 he
to foreign exchange, his suggested stability took important preliminary steps for
policies and his suggestions to tie the monetary the stabilisation of the exchange rate of
policy to rules, Rueff was ahead of his time. the franc and the re-establishment of
Some of his reform suggestions became accept- the gold convertibility of the franc by
ed practice; for example, in the European Prime Minister Poincaré.
monetary system and in the →European On the basis of purchasing power
Economic and Monetary Union. and wage parities, Rueff worked out an
exchange rate for the franc which was
Rueff ’s most important theoretical implemented through the introduction
work is L’ordre social (1st ed 1945). The of the ‘franc Poincaré’ and which was
title of the German translation as The stable and could be converted into gold.
Social Order (1952) is misleading; ‘The By choosing the correct exchange rate,
Economic and Social Order’ would be Rueff maintained that the return to the
more correct. On the basis of price, gold currency in France did not entail –
production, monetary and market theo- as it previously had in Great Britain –
ry, Rueff in this work develops an infla- deflation and falling wages.
tion theory and a theory relating to the Rueff ’s most important achieve-
economic and social order. He starts ment is certainly the conception of the
with the then innovative idea (hardly 1958 economic and currency reform in
appreciated by most critics) that each France, which even goes back to his ini-
good’s exchange (purchase, sale) in the tiative.
market is an exchange of property rights The economic situation in France in
(droits de propriété). This makes Rueff the 1958 had reached crisis point: a high
most important forerunner of the mod- budgetary deficit, inflation, flight of
ern property rights theory. capital, shrinking foreign exchange
Rueff also uses the property rights reserves, exchange control, import pro-
theory to explain inflation: the state tectionism, the loss of international
creates ‘fake’ (or ‘false’) property rights competitive ability and devaluation pres-
in order to finance budget deficits by sure. On Rueff ’s instigation, a commit-
forcing the (instruction-dependent) tee which he chaired compiled a consis-
central bank to accept basically worth- tent reform programme for the govern-
less government stocks as the basis for ment, which in 1958/59 was put into
the creation of central bank money, practice by Head of Government de
which is put at the disposal of the state Gaulle and the Finance Minister Pinay:
for the purpose of demand for goods
and services. If the price increases • In order to stop inflation, the financ-
caused by this additional demand are ing of household deficit by the central
suppressed by a price and wage freeze, bank had to be prohibited and the
instead of open inflation, ‘repressed’ deficit itself eliminated.
inflation (inflation réprimée) will develop.
The battle against inflation and for • For the elimination of the budget
currency stability forms a recurring deficit, taxes had to be increased and
62 Jacques Rueff
consumptive public expenditure – and included recommendations for the

especially →subsidies – had to be removal of restraints of competition,
reduced: however, national capital restrictions to market entry, govern-
expenditure was increased (→public ment price-fixing and the rigidity of the
expenditure). job market – as well as improvements in
the educational system and in adminis-
• Index-linked wages and other tration.
→incomes were abolished. Since 1961 Rueff made a name for
himself as a critic of the Bretton Woods
• In order to prevent price increases, a ‘world monetary system’, which was in
large number of quantity restrictions force at the time. The gold dollar stan-
for imported goods were waived: this dard of the time made it possible for the
generated competitive pressure from key currency country – which was the
imports. United States (US) – to maintain budg-
et deficits and balance of payment
• In order to restore the competitive deficits financed by inflation for many
ability of the French economy, which years, without being forced to devalue
had been impaired by inflation, the the dollar and impose an inflation
franc was devalued. freeze. Thus the dollar reserves of the
foreign central banks kept growing
• Simultaneously, as a ‘confidence- (which led to an imported inflation in
building measure’, a new currency, those countries).
the ‘new franc’ (= 100 old francs), Rueff soon saw the danger that the
was created and the convertibility of gold reserves of the US would no
the franc was introduced, i.e. longer suffice to keep the formally
exchange controls were abandoned. existing obligation for the redemption
of these dollar reserves in gold. He
The reforms proved a great success. feared as a consequence either a defla-
The French post-war inflation was sud- tion crisis in the US or the abolition of
denly over, the national budget was the gold convertibility of the dollar. The
reorganised, the exchange rate was sta- latter actually occurred in 1971.
bilised, the balance of payments was In order to overcome the instability
adjusted, economic growth was secured and susceptibility of the gold dollar
for years to come and the French econ- standard to inflation, Rueff suggested
omy was made competitive for the the return to the international gold
Common Market. standard: the monetary policy of the
For the elimination of the remain- central banks should thereby be sub-
ing obstacles, in 1959/60, again on jected to rules; for the reconciliation of
Rueff ’s initiative, a second committee the balance of payments deficits only
of experts chaired by Rueff and Louis gold transfers were to be used instead of
Armand compiled a report on the hin- foreign exchange. Countries with bal-
drances to economic growth (Rueff ance of payments deficits would there-
Armand report). This constituted the by have been subjected to an obligation
world’s first →deregulation programme to adopt stability policies. President de
Alexander Rüstow 63
Gaulle gave Rueff ’s reform suggestions Rüstow, Alexander

his support, but was not able to imple- Born 8 April 1885
ment them internationally. Died 30 June 1963

Subsequent to his military service, he
entered the École Polytechnique in Paris in
1919. From 1922, lecturer in Statistics and
Mathematical Economics at the University
of Paris. A pre-selection examination in
1923 (Concours) opened up the career of
Inspecteur Général des Finances, one of the
most distinguished positions in the French
administration. 1927–1930 member of the
Economic and Financial Committee of the
League of Nations (Geneva), 1930–1934
finance attaché at the French embassy in
London. From 1931, professor of Political
Economy at the École Libre des Sciences
Politiques, Paris (subsequently Institut des ‘If you need a helping hand, first look for it at
Sciences Politiques). 1934–1939 at the French the end of your right arm.’ This favourite
Treasury, 1939–1940 vice-president of the
expression of Rüstow’s illustrates his deep
French central bank. From 1945 on, he was
conviction that on the basis of freedom and
an economic adviser to the French Military
Government in Germany. From 1952 on, he individual responsibility, everybody should
was on the bench at the Court of Justice of make the effort to organise and secure his own
the European Community for Coal and existence to the best of his abilities, while
Steel. 1958–1962 at the European Court of expressing his creative energy in his (immedi-
Justice. During the 1960s, he was an eco- ate) environment. But it was a long time
nomic advisor to French President de before Rüstow came to this conclusion. After a
Gaulle. Member of the Académie Française broad classical education, he studied the theo-
and the Académie des Sciences Morales et ry of →socialism as well as that of →liber-
Politiques. alism in detail, ending up in the opposition
and eventually in exile during the Third
REFERENCES:
Reich. As early as 1932, and having experi-
RUEFF, J. (1977-81), Œuvres complètes
(Complete Works), 4 vols, Paris, available in
enced the ongoing economic crisis during the
English translation: New York (Lehrman Weimar Republic, Rüstow took a determined
Institute). Autobiography, in German trans- stand against interventionist economic policies
lation: Die soziale Ordnung, Bremen 1952; by the state (→interventionism). The state
KNAPP, F. (1972), Die Währungssünden der should rather be a referee, concentrating on
westlichen Welt, Frankfurt. the creation of and the adherence to the eco-
nomic and socio-political framework.
Josef Molsberger Competition as the fundamental coordinating
principle in a market economy helps to create
and preserve space for personal decision-mak-
ing and acting.
64 Alexander Rüstow
Rüstow’s aim was a liberal society which cy’. Through this vital policy he wants
puts people first and is organised in such a way to organise the daily life of the individ-
that the behaviour that comes naturally to ual in his family situation, in his living
humans is captured and put to good use. and work environment, thus ensuring a
Rüstow developed this concept of a social order humane existence. Rüstow sees his vital
because he was interested in a large variety of policy concept as a part of economic
topics, and finally put what he had learnt from policy and therefore subjects it funda-
his research in cultural history, sociology and mentally to the same expectations. For
economics together, as in a jigsaw puzzle. the vital policy, the principles of market
Because Rüstow was one of the pioneers of this conformity, subsidiarity and the basic
sort of concept, he is now, together with Walter equivalence of service and counter-
→Eucken, Wilhelm →Röpke, Alfred service as part of the economic
→Müller-Armack, Franz →Böhm and exchange process apply accordingly.
Ludwig →Erhard considered one of the Social policy issues, such as social
founding fathers of the →social market security, equal opportunities, equal
economy. access to education or housing and
→family policies, can only be dealt with
In the social system conceptualised by in the context of neo-liberal order con-
Rüstow, where democracy and the cepts. For Rüstow, the social question is
→market economy are totally intercon- thus essentially a part of the question of
nected, different spheres of interest the economic order.
exist, which he classifies as economic In order to implement this neo-lib-
and supra-economic. For Rüstow, the eral economic and social system,
economy holds a subordinate position Rüstow explains what he expects from
in that it merely serves the purpose of every member of society: he expects
satisfying the material needs of separate people to treat one another with con-
individuals and society as a whole. sideration and responsibility, while
→Competition is seen as the main organ- showing respect for the needs of others.
ising principle of the market. But at the In addition, he makes repeated appeals
same time, the institutional order poli- to the people to take their fate into their
cy framework imposes boundaries on own hands and to do their best to pre-
the competition among the economic serve their own personal freedom and
agents in the market, preventing the thus to ensure a free society.
formation of monopolies and distorted Rüstow had a marked influence on
competition. All the other areas of life – neo-liberalism and its development. In
such as culture, education and family, particular on:
ethics and religion – are more impor-
tant to Rüstow than the economy; he • the intellectual background of the
argues that in these areas of life, behav- neo-liberal economic and social
iour is controlled by moral values. order, and its distinction from
Rüstow wants to complement this →socialism and (old) economic liber-
institutional order policy framework alism;
with a comprehensive, coherent social
policy, which he refers to as ‘vital poli- • clarifying the importance of an insti-
Karl Schiller 65
tutional framework for a lasting 1914–1918 military service with the artillery,
peaceful economic and social order; later promotion to reserve lieutenant; award-
and ed the Iron Cross 1st and 2nd class.
1919–1924 consultant for cartel issues at the
National Ministry of Finance. 1924–1933
• the identification of the supra-eco-
head of the Economic Policy Department at
nomic variables with an impact on the Association of German Mechanical
human life. Engineering Institutes. 1933–1949 professor
at the University of Istanbul in the Chair of
In reality, the economic policy-mak- Economic Geography and Economic and
ers since 1948 have only paid limited Social History. 1949–1956 professor at the
attention to Rüstow’s principles of sub- University of Heidelberg, in the Chair of
sidiarity, performance-based reward Economic and Social Science. 1955–1962
and consistent economic behaviour. chairman of the ASM.
Besides the many occasions when
REFERENCES:
the realisation of the social market econ-
RÜSTOW, A. (1932), Freie Wirtschaft –
omy was compromised, it could be
Starker Staat (Die staatspolitischen
explained by the fact that the develop-
Voraussetzungen des wirtschaftspolitischen
ment of the complex neo-liberal eco- Liberalismus), in: Boese, F. (ed), Deutschland
nomic and social order on the one hand, und die Weltkrise, Schriften des Vereins für
and its political implementation on the Socialpolitik, Vol. 187, Dresden, pp. 62-69,
other, was handled by many different recently published in: Hoch, W. (ed),
people. It can therefore be assumed that Alexander Rüstow. Rede und Antwort, pp. 249-
those making the political decisions at 258, also available under the title:
the time lacked a detailed understanding Interessenpolitik oder Staatspolitik? in: Der
of the way a neo-liberal institutional deutsche Volkswirt, 7(6), Berlin 1932, pp. 169-
framework should be organised. 172; — (1945), Das Versagen des Wirtschafts-
liberalismus als religionsgeschichtliches
Until late in life, Rüstow never tired
Problem, in: Istanbuler Schriften, 12, Istanbul,
of lending support to a systematically
Zurich, New York, 2nd edition, Helmut
organised social market economy, for Küpper 1950; — (1950 et al)
example, in his capacity as head of the Ortsbestimmung der Gegenwart. Eine uni-
Social Market Economy Action Group versalgeschichtliche Kulturkritik. I. Vol.:
(ASM) and by way of political consul- Ursprung der Herrschaft, Erlenbach-Zurich
tancy. 1950, II. Vol.: Weg der Freiheit, Erlenbach-
Zurich 1952, III. Vol.: Herrschaft oder
ACADEMIC AND PROFESSIONAL CAREER: 1903 Freiheit? Erlenbach-Zurich 1957.
school-leaving certificate with emphasis on
the Classics in Berlin; 1903–1908 undergrad- Jan Hegner
uate studies in Classical Philology,
Philosophy, Mathematics, Physics, Law and
Economics in Göttingen, Munich and Schiller, Karl
Berlin. 1908 doctorate in Classical Literature Born 24 April 1911
on the Paradox of the Cretan Liar (‘The Liar. Died 26 December 1994
Theory, History and Solution’, Leipzig
1910). 1908–1914 editor at a renowned Not many people are able to combine academ-
Berlin publishing firm for classical texts. ic and political careers. But two who succeed-
66 Karl Schiller
ed left their mark on the economic policy of the 1935–1941 head of a research group at the
Federal Republic of Germany: first Ludwig Institute for Economics at the University of
→Erhard, then Karl Schiller. Both were aca- Kiel. 1939 postgraduate lecturing qualifica-
tion in Kiel. 1941–1945 military service.
demics before they became politicians, both
1944 offer of a position at the University of
experienced the tension between economic the-
Rostock (not taken up). 1946 visiting pro-
ory which is for the medium- or long-term, fessor at the University of Kiel. 1947–1972
and the short-term nature of political practice. professor at the University of Hamburg
Schiller had a gift for detailed analysis com- (1956–1958 rector). 1958–1960 member of
bined with great rhetorical brilliance and per- the Scientific Advisory Council of the
suasive power. In the course of his academic Ministry of Economic Affairs.
and ministerial career, he turned more and
more towards the →market economy. This POLITICAL CAREER: 1946 joins the SPD.
is why he bequeathed his extensive specialist 1948–1953 senator for Economic Affairs
library to the Walter-Eucken Institute in and Transport in Hamburg. 1949–1953
Freiburg. member of the Upper House of Parliament.
1961–1965 senator for Economic Affairs in
In 1953, Schiller coined his famous West Berlin. 1964 voted on to the executive
motto ‘Competition as far as possible, committee of the SPD. 1965 Member of
planning as far as necessary’, which Parliament, deputy party chairman and SPD
despite some resistance was incorporat- parliamentary group speaker on economic
affairs. 1966–1972 Federal Minister of
ed into the 1959 Godesberg Pro-
Economic Affairs, and from 1971 also
gramme of the Social Democratic Party
Federal Minister of Finance. 1972 resigna-
(SPD). The collection of essays pub- tion because of fundamental differences of
lished in 1964 under the title The opinion on fiscal policy. 1972 withdrawal
Economist and Society had the subtitle from the SPD, 1980 re-entry. Later exten-
‘Liberal and social elements in modern sive mediation and especially consultancy
economic policy’. work, also abroad.
While Schiller was Federal Minister
of Economic Affairs under the great REFERENCES:
coalition, the Stability and Growth Act SCHILLER, K. (1936), Arbeitsbeschaffung und
was adopted in 1967. It bore his stamp Finanzordnung in Deutschland, Berlin (disser-
in many essential passages. Schiller tation, banned after publication); — (1940),
Marktordnung und Marktregulierung in der
himself later assigned increasing impor-
Weltagrarwirtschaft, Kiel (Habilitations-
tance to competitive →institutional order
schrift); — (1964), Der Ökonom und die
policy and became the ‘market con- Gesellschaft. Das freiheitliche und das soziale
science’ of the SPD. He was in favour Element in der modernen Wirtschaftspolitik,
of the reunification of the two German Stuttgart; — (1994), Der schwierige Weg in die
states in general, while being critical of offene Gesellschaft. Kritische Anmerkungen zur
it in detail. deutschen Vereinigung, Berlin.
ACADEMIC CAREER: 1931–1935 undergradu- Egon Tuchtfeldt

ate studies in Kiel, Frankfurt, Berlin,
Heidelberg. 1934 graduated in economics.
1935 doctorate in political sciences.
Hanns-Martin Schleyer 67
Schleyer, Hanns-Martin 1972, he was elected chairman of the

Born 1 May 1915 Metal Industry Federation of Baden-
Died 18 October 1977 Württemberg, before becoming deputy
chairman of Gesamtmetall. In 1973,
Schleyer laid down his socio-political credo – Schleyer agreed to take over the office of
the conviction ‘that every political action is the president of the Federal Union of
determined by the concepts of liberty, toler- German Employers’ Associations
ance, performance’ – in his book The Social (Federal Employers’ Association) whose
Model, published in 1973. Here, he vice-president he had been since 1965.
uncompromisingly turns against any interfer- Schleyer was elected president of the
ence with the →market economy which is Federal Association of Industries with
not inherent in the system. effect from the beginning of 1977. This
is how, for the first time, both large fed-
Schleyer read Law and Political Science erations had the same chairman. On
(1933–1938) in Heidelberg and Schleyer’s initiative, they became more
Karlsruhe, and Economics in Prague focused on social and socio-political
(graduation 1941). He received a doc- problems. Schleyer, as a representative
torate in Law in Innsbruck in 1951. of the German economy, was kidnapped
During his academic training he was on 5 September 1977 by a terrorist
involved in student social work. group and found murdered in a parked
Following his military service, he saw car on 19 October 1977 in Mülhausen,
action and was discharged from the Alsace.
army on medical grounds. From 1942
to 1945, Schleyer held a position at the REFERENCES:
Central Industry Federation of Internet: www.dihk.de.

Bohemia and Moravia in Prague. From
Franz Schoser
1945 to 1948 he was first a French pris-
oner of war and then director of foreign
trade at the Chamber of Commerce
and Industry in Baden-Baden. In 1952 Schmölders, Günter
he joined Daimler-Benz, the Stuttgart Born 29 September 1903
automobile company, where he became Died 7 November 1991
a deputy board member in 1959 and a
full member in 1963 with responsibili- Schmölders was deeply sceptical of the idea of
ty for human resources, social and the state as the ‘benevolent dictator’, which
training policies. In 1976 his responsi- features in large tracts of contemporary eco-
bility in this large corporation was nomic theory and where market failure is
extended to basic company policy and mentioned more frequently than government
social issues. failure. During the Second World War, he
It was not long before Schleyer had been close to the Kreisau Circle and the
played a prominent role in the federa- men of the 20 July 1944 assassination
tions. From 1962 to 1968 he was chair- attempt on Adolf Hitler. After the war, he
man of the Metal Industrialists’ joined the Social Market Economy Action
Federation of Württemberg-Baden. In Group (ASM) and was an active member of
68 Günter Schmölders
the Mont Pèlerin Society, an international ACADEMIC AND PROFESSIONAL CAREER :
association of liberal economists. Thus Doctorate and post-doctoral lecturing quali-

Schmölders regarded it as an apt description fication in Berlin, 1934 professorship in
Breslau (as successor of Karl Bräuer); from
when, on his 85th birthday, a speaker referred
1940 until his retirement in 1971 professor-
to him as ‘a dyed-in-the-wool liberal’.
ship in Cologne (as successor of Erwin von
Beckerath) and at the Research Institute for
Schmölders was always concerned with Finance founded by Fritz Karl Mann in 1927;
the practical side of economics, with a 1965/66 rector, honorary doctorates from
special focus on public finance and Innsbruck and Gent. From its establishment
money. He did not develop mathemati- in 1950 until 1975, member of the Scientific
cal models but was involved in empiri- Advisory Council at the Federal Ministry of
cal research on socio-economic behav- Finance. From 1959, full member of the
iour on the basis of sociological and Academy of Sciences and Literature in
socio-psychological methods. Mainz. 1969, Order of Merit of the Federal
Titles like The Irrational Aspect of the Republic of Germany, 1st Class. Symposium
at the Berlin Centre of Sciences in 2003 to
Public Finance System (Hamburg, 1960)
mark the centenary of his birth.
and Finance and Tax Psychology
(Hamburg, 1970) yielded useful results REFERENCES:
for the study of finance (as public SCHMÖLDERS, G. (1988), Gut
finance theory) and were incorporated durchgekommen? Lebenserinnerungen, Berlin;
into the major works on financial theo- KIRSCH, G. (1993), In memoriam Günter
ry: Financial Policy (3rd ed, Berlin, Schmölders. Gedenkrede, Kölner Universi-
Heidelberg, New York, 1970) and tätsreden, 73, Cologne; ZIMMERMANN,
General Introduction to Taxation (5th ed, H. (1998), Schmölders, Günter, in: Killy,
Berlin, 1980, this edition in cooperation W./Vierhaus, R. (ed), Deutsche Biographische
with K.-H. Hansmeyer). He used the Enzyklopädie, 9, Munich, pp. 38.
same methods to deal with financial
Horst Zimmermann
issues. Accordingly The Psychology of
Money (Reinbek, 1966) and Good and
Bad Money (Frankfurt, 1968) can be seen
as preliminary studies for his Monetary Schreiber, Wilfrid
Policy (2nd ed, Tübingen, Zurich, 1968). Born 17 September 1904
Today, one would group Schmölders Died 23 June 1975
with the new →institutional economics and
the public choice school because – Schreiber was surely one of the outstanding
ahead of his time – he considered the social politicians of the post-war period. Before
personal interests of those involved embarking on his academic career, he held the
(Politicians and the Currency, Frankfurt, position of general secretary of a federation of
1959), and the influence of the parties industrialists. Even then, he used to voice his
and federations on the formation of the opinions, based on the →Catholic social
political will and thus on economic pol- doctrines, on issues of family burden com-
icy. pensation, →co-determination, →wealth
accumulation policies for the workforce
and especially →pension reform.
Wilfrid Schreiber 69
His most important scientific contribu- otherwise identical circumstances, the

tion was the Schreiber Plan, whose same pension payouts as those who
underlying idea was that ‘an adequate have brought up and looked after chil-
proportion’ of wage-earners’ incomes dren, →social justice is seriously compro-
should be allocated to children and ado- mised.
lescents not yet capable of, and engaged In the commemorative publication
in, gainful employment (as a youth (Festschrift) mentioned below, Federal
pension) on the one hand and, on the Chancellor Kiesinger was right to stress
other hand, to those no longer earning that Schreiber had ‘made a significant
an income (as an old-age pension). contribution through his scientific
Old-age pensions were to be initial- research, his socio-political involve-
ly determined by the level of income ment in the Federation of Catholic
earned in each case and by the contri- Entrepreneurs and in advising the fed-
butions paid by each member during eral government on social policy issues
his active working life, while the so- for the advancement of our social poli-
called existing pensions were supposed cy’.
to be linked to the annual development
of earned incomes. ACADEMIC AND PROFESSIONAL CAREER :
This ‘dynamisation’ of pensions 1922–1930 studies in Economics and Social
means that those no longer gainfully Science (Cologne), Engineering (Aachen
employed are able to partake in pros- and Munich) and Mathematics and Physics
perity developments. (Cologne). 1931–1947 journalist. 1947 fur-
Schreiber’s idea of a youth pension ther studies in Economics and Social
dates back to 1951, but has gained new Science at the University of Bonn leading to
topicality. It is based on the view that a his doctorate in 1948 under Erwin von
Beckerath. 1955 post-doctoral lecturing
society not only has the duty to look
qualification. 1949–1959 general secretary
after those no longer gainfully
of the Federation of Catholic Entre-
employed, but that it should also pro- preneurs. 1960–1972 chair for Social Politics
vide for those who are not yet capable at the University of Cologne.
of, or engaged in, earning an income.
His suggestion that not only parents but REFERENCES:
society as a whole should provide finan- ANON. (1969), Schriftenverzeichnis zu
cially for the younger generations, was Schreiber, in: Greiß F./Herder-Dorneich,
not implemented. This political omis- P./Weber, W. (ed), Der Mensch im
sion was bound to undermine the long- sozioökonomischen Prozess, Festschrift für
term financial stability of old-age pen- Wilfrid Schreiber zum 65. Geburtstag,
Berlin; SCHREIBER, W. (1955),
sions in a society where, because of an
Existenzsicherheit in der industriellen
increased lifespan on one hand and a
Gesellschaft. Vorschläge zur Sozialreform,
strong decline in the birth rate on the in: Schriftenreihe des Bundes Katholischer
other, fewer and fewer employed peo- Unternehmer, Cologne; — (1951),
ple have to provide for more and more Kinderzulage für alle Arbeitnehmer, in:
pensioners. Rheinischer Merkur, 21 September 1951.
In a society where those who have
not brought up children receive, under Heinz Lampert
70 Gerhard Stoltenberg
Stoltenberg, Gerhard (CDU) in 1947 and was, as a young

Born 29 September 1928 student of history, the social sciences
Died 23 November 2001 and philosophy, deeply impressed by
Erhard’s liberating act of abolishing
Stoltenberg’s personal experience of the misery rations and similar economic interven-
of the war and post-war years – he was a tions and by the optimism, confidence
young anti-aircraft auxiliary in British cap- and economic dynamism this created.
tivity when the war ended – and the fact that Economic prosperity had proved to be
he had grown up as the son of a protestant the right foundation for a stable demo-
minister, his broad knowledge of history and cratic system.
the arts as well as firm Christian values pro- Stoltenberg was planning to bring
duced in him a profound scepticism of euphor- about a renewal of the social market
ic planning and faith in the controllability of economy. The excessive demands on
social and economic processes, which dominat- financial policy during the 1970s meant
ed the ‘modern financial policy’ of the late- that budgetary expenditure had to be
1960s and the 1970s. Stoltenberg wanted, curbed in order to reduce the govern-
promoted and practised a financial and eco- ment’s share of total expenditure.
nomic policy based on social and ethical prin- Furthermore, a restructured tax system
ciples along institutional order policy lines and was to stimulate growth and ensure the
functioning as a conceptual unit of budgetary, recognition of personal achievement.
fiscal, monetary and privatisation policies. In 1982 Stoltenberg set out to break
the pattern of a constantly growing state
His goal was an economic order con- share of the total economy and con-
ceived as the core of a liberal constitu- stantly growing public expenditure.
tion, while he saw a need to resuscitate Consolidation became the main aim
the revitalising forces of the social mar- of his financial, economic and social
ket economy. The situation at the begin- policies. The state ratio decreased from
ning and at the end of his term in office 51.9% in 1982 to 45.8% in 1990. In
as Federal Minister of Finance from 1989, both the regional government
1982 until 1989 reflect the effectiveness authorities and the social security
of Stoltenberg’s policies. But he was at schemes achieved their first budget sur-
times only able to implement these in pluses in almost 20 years, and in the
greatly diminished form because of a same space of time the regional govern-
lack of support by the governing bodies ment authorities reduced their deficit
of the coalition and by the public, whose from s32.2 billion to s6.4 billion. The
faith in the basic tenets of institutional federal government’s net borrowings
order policy tended to be fickle. decreased from DM37.2 billion in
Konrad Adenauer and Ludwig 1982 to DM19.2 billion in 1989.
→Erhard were the main points of refer- Stringent economic measures together
ence for Stoltenberg’s practical policies, with increased revenue thanks to a
with Walter →Eucken, Alfred →Müller- prospering economy, were responsible
Armack and Wilhelm →Röpke forming for this development.
the theoretical background. He joined It would have suited Stoltenberg’s
the Christian Democratic Union economic policy thinking if after the
Gerhard Stoltenberg 71
successful quantitative consolidation of distribution policy issues together with

the early years, he could have focused tax exemption for aviation fuel, dis-
his energies on the qualitative improve- counts for one-year-old cars, extra pay
ment of public budgets, by allocating for Sunday work and taxation at the
more money to investments for the source were beginning to dominate the
future. He had succeeded in doing this picture. And there were setbacks associ-
as Federal Minister of Science and ated with the expanding assessment
Research under Federal Chancellor basis, i.e. the reduction of fiscal →subsi-
Erhard, but the markedly more relaxed dies.
financial situation in general meant that Stoltenberg overestimated the key
the coalition, as well as the federal states figures in politics and economics and
and municipalities, did not feel an their commitment to institutional order
urgent need for reforms. Nobody policy and genuine reforms as much as
realised then that the social security sys- he overestimated the level of economic
tem should have undergone far-reach- expertise in public debate. Science, eco-
ing reforms; on the contrary, more nomics and politics nevertheless regard
long-term projects causing increased his fiscal policy in an extremely positive
expenditure were approved and the cut- light, not least in view of the situation
back of subsidies ground to a halt. before and after his term of office.
Without these palpable successes In close cooperation with the
and consistent consolidation policies, Federal Bank, Stoltenberg achieved the
the three-phase tax reforms of 1986, stability-oriented union of monetary
1988 and 1990, with net savings of and fiscal policy. Just like the markets,
approximately s25.6 billion, would not the financial guardians trusted his poli-
have been possible. In 1990, the tax rate cies. The discount rate, which in 1983
reached a 30-year low at 22.5%, com- was still 7%, came down to 3% in 1987
pared to 23.8% in 1982. Special burdens and the capital market interest rate fol-
for the federal states and municipalities lowed suit. Everybody at home and
were avoided and their financial posi- abroad was impressed to see the central
tion was improved. bank and the treasury closing ranks
The objective was a complete over- when it came to the organisation of the
haul of the tax system, which would go monetary institutional framework.
far beyond lower taxation. Direct taxes The cooperation with the Federal
were to be lowered for good, while the Bank proved its value during the turbu-
tax law was supposed to promote growth lence of financial crises, the parity
and favour families, making Germany debate in the European Monetary
more attractive as a location for future System (EMS) and in the debt crises of
investments in a climate of increasingly important emerging markets, as well as
fierce international →competition. in the stock exchange crash in the
Despite the fact that the first phase autumn of 1987. Stoltenberg’s unusual
mainly helped smaller →income earners, competence and reliability made him
incorporating patently family-friendly the unofficial leader of the G-7 minis-
elements, the new linear-progressive ters of finance. On 15 March 1988, in
tariff had lasting advantages for all. But his declaration of principle on the
72 Wolfgang Stützel
future of the European currency area, the CDU/CSU faction in the Bundestag;
Stoltenberg highlighted the German 1971–1982 State President of Schleswig-
point of view with regard to a stable Holstein. 1982–1989 Federal Finance
Minister, then until 1992 Federal Minister
development of the EMS, clearly dis-
of Defence; from 20 January 1993 until 30
tinguishing it from nebulous and unre-
March 2001, Deputy Chairman of the
alistic foreign policy concepts. Konrad-Adenauer-Stiftung.
Stoltenberg’s comprehensive out-
line of federal privatisation and public
investment policy, which was adopted REFERENCES:
by the Federal Cabinet on 26 March STOLTENBERG, G. (1954), Der Deutsche

1985, reflects the absolute priority of Reichstag 1871 bis 1873; — (1960), Die poli-
private →property and private initiative tischen Strömungen im schleswig-holsteinischen
Landvolk 1919-1933; — (1968), Hochschule
in his theoretical and practical approach
Wissenschaft Politik; — (1969), Staat und
to the market economy. In the years to
Wissenschaft; — (1978), Schleswig-Holstein
come, the federal government priva- heute und morgen; — (1986), Unsere
tised a large proportion of its industrial Verantwortung für eine gute Zukunft; —
properties. (1997), Wendepunkte; KONRAD-ADE-
The almost seven years of Stolten- NAUER-STIFTUNG (ed) (1999), Das
berg’s responsibility for financial policy Konzept der Sozialen Marktwirtschaft, (with a
were proof that a renewal of the social foreword by Gerhard von Stoltenberg),
market economy can bring success, Sankt Augustin; SCHLECHT, O./STOL-
greater prosperity, social justice and TENBERG, G. (ed) (2001), Soziale
faith in democracy. Thanks to these Marktwirtschaft. Grundlagen, Entwicklung-
policies, the Federal Republic was able slinien, Perspektiven, Munich.
to carry the economic burden of
Peter Wichert
German unity.
PROFESSIONAL CAREER: 1944–1945 military
service, 1949 school-leaving certificate,
Stützel, Wolfgang
undergraduate studies in History, Social
Science and Philosophy at Kiel, 1954 doc- Born 23 January 1925
torate, assistant lecturer at the University of Died 1 March 1987
Kiel, 1956 assistant lecturer, then lecturer, at
the Kiel Educational College. 1965 and Wolfgang Stützel was one of the most
1969–1970 director of Friedrich Krupp creative, versatile and perhaps also controver-
GmbH. 1947 member of the CDU, sial German economists of the 20th century.
1955–1961 Federal chairman of the Junge The spectrum of his research covered legal
Union, 1955–1971 deputy state chairman of issues and questions of business management
the CDU in Schleswig-Holstein, from and included the micro- and macroeconomics
November 1971 state chairman, 1969
of closed and open economies.
deputy Federal chairman of the CDU.
Member of the Federal State Parliament of
Schleswig-Holstein 1954–1957 and 1971–
Stützel was an uncompromising cham-
1982. Member of the Bundestag 1957–1971. pion of market principles without
1965–1969 Federal Minister of Science and belonging to a particular school of
Research, thereafter Deputy Chairman of thought. Many of his scientific insights
Wolfgang Stützel 73
initially met with opposition, but they fixed exchange rate system of Bretton
then became generally accepted as part Woods, which was in force at the time.
of economic policy because they were Stützel resigned from the Council of
built on a solid institutional order poli- Experts early, since he felt that the coun-
cy foundation, which Stützel developed cil’s majority was restricting his views.
with great consistency. His clarity of It is Stützel’s great intellectual
vision and his readiness to contradict, achievement that he recognised in the
animated the academic debate and 1960s how unstable a system of flexible
influenced the organisation of econom- exchange rates would be. He pointed
ic structures in Germany. out that it was hardly likely that the
In his dissertation (1952), Stützel adoption of flexible exchange rates
focused particularly on the phenome- would lead to greater financial autono-
non of economic power, which he my, particularly in smaller countries.
attributed to the relationship between In the 1970s, Stützel concentrated
the value and the price of a commodity. on an analysis of why, after the reces-
One of his simplest and most memo- sion of 1974/75, →unemployment had
rable messages was the sentence: ‘Paying gone up so much. He quickly under-
and receiving market prices means pro- stood that the problem was not so
tecting one’s freedom and dignity’. much economic as structural. He
His post-doctoral thesis (1958) dealt therefore argued in favour of a reduc-
with the ‘balance mechanisms’ of tion of social welfare assistance (→basic
macroeconomic interactions. An social security) and of protection against
important outcome of his analysis was unfair dismissal, as well as a complete
that free loan conditions are necessary re-organisation of the German social
to keep a national economy solvent, i.e. security system. Stützel gives an
a complete and liberalised banking sys- overview of these concepts in his book
tem is required. In a report on German Market Price and Human Dignity (1981).
banking regulations (‘Banking Policy – His contributions on the opera-
Today and Tomorrow’, 1964), Stützel tional systems of banks are just as inno-
insisted on the complete removal of vative – for example, those regarding
government regulations of debit and the development of insider regulations
credit interest which were still in force and his commitment to the individual
during the early 1960s. One significant share certificate (‘no-par share’), for the
result of this study was the ‘maximum obligation to disclose secret reserves in
load theory’, which can be regarded as a the balance sheet and for an imputation
forerunner of the ‘value at risk’ models. system (‘partner tax’) in the corporation
Through being a member of the tax. Many of his innovations went into
→Council of Experts for the Investigation legislation, although the imputation
of Economic Development (1966– system was later phased out with the
1968), Stützel found himself in the 2001 tax reforms.
crossfire of the heated debate about ACADEMIC CAREER: Doctorate 1952; post-
German exchange rate policy. In con- doctoral lecturing qualification 1957; 1958-
trast to the majority of the council, 1987 professor at the University of
Stützel supported strict adherence to the Saarbrücken.
74 Helmut Thielicke
REFERENCES: Theological Ethics deals with the competi-

STÜTZEL, W. (1978), Volkswirtschaftliche tive economy as a universal system.
Saldenmechanik, 2nd edition, Tübingen; —
(1981), Marktpreis und Menschenwürde,
Thielicke’s ethics were based on the
Stuttgart; SCHMIDT, H./KETZEL, E./
‘Doctrine of Eons’ (theory of the ages).
PRIGGE, S. (ed) (2001), Wolfgang Stüzel
Moderne Konzepte für Finanzmärkte,
It teaches that man is in a state of conti-
Beschäftigung und Wirtschaftsverfassung, nuity and discontinuity with this eon,
Tübingen. the age between the creation of the
world and its end. Continuity consists
Peter Bofinger in the fact that we are subjected to the
laws and systems of this world. God did
not dissolve this eon; its ‘structural
laws’ impose order on life. Christians,
Thielicke, Helmut however, have been saved and are thus
Born 4 December 1908 no longer subject to worldly powers.
Died 5 March 1986 They live in Jesus Christ under the lib-
erating grace of the gospel. This is
The conservative protestant theologian where the aspect of discontinuity is
Thielicke taught dogma and ethics – ulti- expressed.
mately in Hamburg. He subscribes to Thielicke places the Lutheran doc-
neither the capitalist economy nor to trine of justification, which describes
→socialism. For Thielicke, there are no this area of conflict, at the centre of his
hybrids. Thielicke does not promote a God- considerations. This doctrine sees man
given economic system; rather he feels it is our as sinning and righteous (saved) at the
responsibility to organise the material aspects same time. The concept of the systems
of the way we live. The competitive economy, (orders) (politics, the state, economics,
which can be seen as a worldly structural law etc.) was borrowed from Lutheranism.
since it uses egoism as the driving force of For Thielicke, these function as organ-
human existence, has a specific ‘affinity for ising emergency directives (from the
human nature’ (and is most suited to time of creation until the end of the
humans). This means that in human nature, world). He saw them as protecting the
God is pitching ‘the egoism of competition world after the Fall. In his view, only
against the egoism of laziness’. The state has family and marriage were conceived
to be strong enough to be able to ensure that even before creation as ordering princi-
competition is based on performance. It has to ples for the world.
intervene and control when →competition, In times when the inherent laws of
which has a tendency to run to excess, starts to the different spheres of life (‘practical
use the human need to earn a living as an constraints’) are interpreted as a superfi-
‘unrestrained driving force’ (Alexander cial world view, the law is necessary as a
→Rüstow) and an end in itself. constant warning (as a pointer to the
Thielicke was one of the few prominent provisional nature of the present age).
Protestant-Lutheran theologians who sincere- For Thielicke, the economy serves the
ly concerned themselves with ethical and insti- satisfaction of needs with its own inher-
tutional problems in the economy. His ent laws. He sees its theological and eth-
Otto Veit 75
ical task in marking out a path for future REFERENCES:
acting. That means inherent laws of ‘rel- THIELICKE, H. (1958ff.), Theologische

ative rank’. Christian theology and the Ethik, 4 vols, Tübingen; — (1968ff.), Der
Evangelische Glaube, 3 vols, Tübingen.
Church will therefore only endorse an
economic system which recognises this
Rolf Kramer
relative rank of the inherent laws and
which is in tune with human nature.
Both – in the form of Christian ethics –
have to make the ‘pitfalls of evil’ visible. Veit, Otto
For the state, the relative nature of Born 29 December 1898
the inherent laws means two things: Died 31 January 1984
having to police the market strictly; and
having to implement a →social policy. Veit, the son of a general, is seen as one of the
This means that the state has the task of most outstanding post-Second World War
steering the economy between →liberal- currency and monetary theoreticians in the
ism (laissez-faire) and dirigism. Any Federal Republic of Germany. He made an
other influence on the economy is important contribution to the implementation
unacceptable to Thielicke. Therefore of a stable financial and monetary constitu-
he is also against any kind of →social- tional framework and thus has helped to
ism/planned economy. In his positive atti- make the concept of the social market economy
tude to the competitive economy, a reality. Beyond that, Veit had a great inter-
Thielicke comes close to Rüstow’s est in philosophy and sociology and acquired a
thinking. But, for him, one thing is cer- reputation as a universal scholar. The fact that
tain: any economy, however intact, is he saw himself as a ‘liberal’ and was an active
branded by the fallen eon. member of the Freiburg Ordo Circle, are
proof that he must be counted among the
architects of the social market economy. Veit
Thielicke was a disciple of the Lutheran had a reputation as an excellent writer and
theologian Paul Althaus in Erlangen and
speaker, had a classical education and was
remained faithful to the Lutheranism which
respected for his strong and highly principled
was practiced there without being commit-
ted to the political outlook of its teacher. personality.
During the Third Reich he was on the side
of the Confessional Church. This is why he Veit’s academic publications primarily
lost his temporary professorship in refer to currency and monetary policy
Heidelberg. After the war, he was professor and partly even pre-date his time at uni-
of Systematic Theology and Ethics in versity. One of his most important
Tübingen and Hamburg; he co-founded works, Real Theory of Money (1966), was
the Faculty of Theology in Hamburg and born out of ideas dating back to the final
subsequently became rector of the weeks of the war; it developed inde-
University of Hamburg. It took him from
pendently of the predominant monetary
1943 until 1964 to write his Theological
theory. Veit’s interpretation of money as
Ethics; the central part numbers over a 1,000
pages. He personally updated the two mid-
a commodity, which does not differ
dle volumes just before his death. He was, from other goods except in the degree of
in addition, a renowned preacher. its liquidity, i.e. its power of disposal
76 Otto Veit
over other goods, runs like a thread joined Hardy & Co. Bankers in Berlin, first
through his publications on monetary as a business consultant, and later, until the
theory and justifies his independent end of the war, as managing director. His
first monetary policy publications date back
position on liquidity theory.
to this time, which is why it is not surpris-
In his compendium Monetary Policy
ing that in 1946 he first became general
as the Art of the Impossible, and in what manager of the Nassauische Landesbank
was a standard work on monetary poli- (Nassau State Bank) in Wiesbaden and a
cy theory during the 1960s and 1970s, year later was made president of the Hesse
Basic Outline of Currency Policy, Veit State Bank in Frankfurt. This also made him
processed the experiences from his time an ex officio member of the central bank
as president of the Hessen State central council of the German States Bank, the
bank. In his books and essays, Veit is not predecessor of the →German Federal Bank
only concerned with monetary theory (central bank). Veit was its acting chairman
and policy, but also with socio-cultural during the early months of its existence and
and philosophical topics. His key inter- he remained in his position at this nerve
centre of currency and monetary policy in
est here is – as in the case of Walter
Germany until 1952, when he was appoint-
→Eucken and Alexander →Rüstow –
ed to the newly established Chair of
personal liberty, which he was keen to Economic and Political Science (Lehrstuhl für
protect even during the National Wirtschaftliche Staatswissenschaften), with a
Socialist dictatorship. This also forms special emphasis on monetary and banking
the basis of his economic theories. policy, at the Johann Wolfgang Goethe
In his main sociological work, University in Frankfurt. At the same time
Sociology and Freedom, published in 1957 he became director of the Institute for
as a revision of The Escape from Freedom, Banking Systems in Frankfurt, where he
which had appeared 10 years before, taught until his retirement in 1969. He was
Veit is discussing the danger of a loss of considered the grandseigneur of German
monetary policy and, in his capacity as head
liberty as a result of ‘excessive material
of the supervisory board, he maintained his
development’. Again and again, Veit is
connection with the Issuing Bank even after
trying to find an explanation for the ter- he had become a university professor.
rible events during National Socialism.
His book Christian-Jewish Coexistence, REFERENCES:
which was published in 1965, is his VEIT, O. (1947), Die Flucht vor der Freiheit:
attempt to prepare the ground for a har- Versuch zur geschichtsphilosophischen Erhellung
monious coexistence in Germany. der Kulturkrise, Frankfurt/M.; — (1948), Die
Volkswirtschaftliche Theorie der Liquidität,
ACADEMIC AND PROFESSIONAL CAREER : Frankfurt/M.; — (1957), Soziologie der
Having completed his military service as Freiheit, Frankfurt/M.; — (1961), Grundriss
well as a degree in political economy and der Währungspolitik, Frankfurt/M.; — (1965),
philosophy in Frankfurt, Veit in 1929 Christlich-jüdische Koexistenz, Frankfurt/M.;
accepted a position as chief editor of — (1968), Währungspolitik als Kunst des
Industrie- und Handelszeitung (Journal for Unmöglichen, Frankfurt/M.; — (1966), Reale
Industry and Commerce) (subsequently Theorie des Geldes, Tübingen.
Nachrichten für den Außenhandel (Foreign Trade
News). In 1934 he had to resign from his Hans Jörg Thieme
position for political reasons. After that, he
Erich Welter 77
Welter, Erich ACADEMIC CAREER: Doctorate in Berlin in
Born 30 June 1900 1921 (under Hermann Schumacher); post-

Died 10 June 1982 doctoral qualification in Frankfurt in 1941
(under Wilhelm Gerloff); from 1944 assistant
professor; from 1948 until his retirement in
Welter tried all his life to familiarise non-
1963 full professor of Economics at the
economists with institutional order policy University of Mainz; founder of the
thinking, which entails thinking in terms of Research Institute for Economic Policy at the
economic interconnectedness, couched in sim- University of Mainz in 1950; 1949–1971,
ple language accessible to everyone. His merit member of the Scientific Advisory Council at
in his fight for a liberal order can hardly be the Federal Transport Ministry; 1953–1975,
exaggerated. His motto was: ‘We cannot hope member of the Research Advisory Council
that the truth will gain the upper hand just for German Reunification.
because it is true. One has to fight for the
truth.’ Among the awards Welter received for PROFESSIONAL CAREER: 1921 joins the edito-
his courageous journalism was the Great rial staff of the business section of the
Frankfurter Zeitung; 1933-1934, editor-in-
Order of Merit of the Federal Republic of
chief of the Vossische Zeitung, which was
Germany (1975), as well as the Ludwig
closed down due to pressure from the
Erhard Medal (1978). Nazis; 1934, returned to the Frankfurter
Zeiting, where in 1943 he was promoted to
Welter was an academic, journalist and deputy editor; in 1943, after the banning of
newspaper entrepreneur, and in each the Frankfurter Zeitung, he became a reserve
one of these roles he was equally com- officer and ‘scientific observer’ in the
mitted to a liberal economic and social Planning Department of the Ministry of
order. At a time when the →social market Armament and War Industries; in 1946, he
economy still had to prove its worth, and helped establish the Wirtschaftszeitung (trade
when a general strike was to force the journal) in Stuttgart (later the Deutsche
Zeitung und Wirtschaftszeitung), from which
resignation of Ludwig →Erhard from
Welter had to resign for reasons related to
his office as Federal Minister of
the legal regulations imposed by the occu-
Economic Affairs, Welter, in close con- pying allied forces; in 1949 the Frankfurter
tact with Erhard, fought for the removal Allgemeine Zeitung (FAZ) was established,
of the remnants of state control in the with Welter remaining its chief editor and
economy, for the →Act Against Restraints thinker until 1980.
of Competition, for the liberalisation of
foreign trade relations, for an independ- REFERENCES:
ent central bank and for a stable curren- WELTER, E. (1954), Falsch und richtig planen.
cy. He also wanted the state to restrict Eine kritische Studie über die deutsche
itself to institutional order policy tasks, Wirtschaftslenkung im Zweiten Weltkrieg,
to withdraw from entrepreneurial Heidelberg; — (1960), Der Staat als Kunde.
Öffentliche Aufträge in der Wettbewerbsordnung,
activities, and to reduce →intervention-
Heidelberg; — (1953), Die wirtschaftspoli-
ism. In his view, the government had to
tische Bildungsaufgabe, in: Hunold, Albert
behave like a consumer along the lines (ed), Wirtschaft ohne Wunder, Erlenbach,
of a market economy. A large number Zurich, pp. 339ff.
of articles in the Frankfurter Allgemeine
Zeitung dealt with these topics. Walter Hamm
employers’ contributions. The level of

Themes these contributions depends on the
salary of the insured employees and on
the accident hazard categories to which
the →enterprises are assigned on the basis
Accident insurance of the frequency and extent of damages
arising in the individual branches of an
Compulsory Accident Insurance (AI) industry.
was first introduced under Bismarck in Measures for the prevention of
1884 and was originally intended as a industrial accidents are among the core
protection mainly for workers and tasks and services of the AI. Within
employees in the industrial sector in the their respective fields of competence,
event of accidents in the workplace. the employers’ liability insurance asso-
Today the number of different func- ciations are entitled to issue and enforce
tions of the AI has grown significantly regulations for the prevention of acci-
in terms of both content and eligibility. dents. In the event of an industrial acci-
The AI extends its cover to basically all dent, the AI provides services for the
workers and employees but also to rehabilitation of the health of the
farmers, people who work from home, injured parties, their reintegration into
entertainers, acrobats, artists and certain working life and, if necessary, financial
small business owners. compensation for them or for their sur-
Also insured are prisoners who vivors. The industrial accident must not
engage in work, lifesavers, blood be intentional, however, or be associat-
donors and persons who give assistance ed with a criminal act. The insurance
at the scene of an accident, as well as cover extends not only to accidents in
those who help protect a person who the workplace but to accidents which
has been unlawfully attacked and those happen en route between the various
who take part in the pursuit or arrest of workshops of an enterprise, on the way
a person suspected of a criminal act. to work or on the way to the bank
The coverage also extends to children where the wages have been deposited
attending nursery schools, pupils by the employer.
attending day schools, learners during Occupational diseases resulting
basic and advanced vocational training, from activities related to certain jobs –
honorary teachers and students during for example, contact with chemicals,
their undergraduate and postgraduate radiation or infectious agents – are also
studies at university. classified as accidents in the workplace.
The commercial and agricultural During the past decades, the report-
employers’ liability insurance associa- ed number of industrial accidents and
tions, which are divided into professions the number of fatal industrial accidents
and industries, and the respective gov- has gone down significantly, both in
ernment accident insurance bodies are absolute terms and relative to the num-
responsible for the implementation of ber of the workers employed. This pos-
AI. The employers’ liability insurance itive trend must be partly attributed to
associations receive their funding via the efforts of accident prevention and
80 Achievement principle
partly to the increasing use of machin- If in liberal systems those who have
ery for the execution of dangerous tasks. been evaluated can go to other evalua-
tors and markets, they are protected
REFERENCES: from an arbitrary judgment.
LAMPERT, H./ ALTHAMMER, J. (2004), In centrally managed economies,
Lehrbuch der Sozialpolitik, 7th edition, Berlin where the markets are not free, this
et al; LAMPERT, H./BOSSERT, A. (2004), escape route does not exist (→socialism).
Die Wirtschafts- und Sozialordnung der
It is true that the socialist principle may
Bundesrepublik Deutschland im Rahmen der
be valid: ‘Everyone according to his abil-
EU, 15th edition, Munich, Vienna.
ities, for everyone according to his
Albrecht Bossert achievements.’ Economic achieve-
ments, however, are only imperfectly
assessed and rewarded depending on the
extent to which politically motivated
Achievement principle programmes are fulfilled. They are not
very flexible and predominantly evalu-
It is essential for every society that its ate achievements according to technical
members are motivated to perform, standards.
thereby attaining benefits for them- The achievement principle is not
selves and others. In the world at large, perfect: markets are often imperfect;
achievements for others usually attract the value, particularly of immaterial
public recognition and in most cases a achievements, is often only recognised
reward. This applies regardless of the too late or the achievements are never
economic system. rewarded; and standards of evaluation
In →market economies, countless buy- change, just like objectives and value
ers are in →competition with one anoth- judgments.
er, evaluating the benefits they can Some see competition as a source of
derive from the achievements of com- ‘self exploitation’ (neglect of relaxation
peting sellers by offering a financial and leisure time), liable to poison
reward which they can pay, because human relationships, particularly with
they themselves have sold an achieve- one’s competitors. The pursuit of the
ment in the market which is useful to maximisation of profit and the avoid-
others. Both partners have to agree to ance of loss are supposed to be the
this exchange and, to this extent, they result of a faulty evaluation of social pri-
have equal rights. orities. A comprehensive assessment,
In hierarchical systems (govern- however, depends largely on the way
ment authorities, schools, →enterprises), earned income is used. In addition, only
on the other hand, superiors, who do one’s own →income and capital permits
not have to be recipients of the achieve- generosity, but it can be gained through
ment, evaluate the achievements of anti-competitive behaviour, obstructing
those who are subject to their judg- others and other privileges.
ment. There can be room for arbitrary Competition leads to better and
decisions restricted by rules, controls or cheaper products and thus allows the
the possibility to escape into markets. results of one’s own efforts to benefit
others. Only if achievements have nomic level that are in →competition

yielded sufficient income and capital with one another. These include, above
reserves, can social security benefits for all, exceptionally damaging pricing and
those who are unable to achieve be territorial agreements. Violations of this
financed. As long as the pressure to prohibition can be penalised with fines
make financial contributions does not running into millions.
excessively weaken the will to achieve The trust prohibition is first of all
and achievement remains recognised, complemented by evasion facts, in par-
income distribution can be modified ticular the recommendation prohibi-
and taxes can be linked to the individ- tion (price recommendations). Second-
ual’s ability to perform. ly, the trust prohibition is limited by
exemptions. Trusts that have been
REFERENCES: legalised based on exemption regula-
WILLGERODT, H. (1973), Das Leistungs- tions are subject to abuse supervision by
prinzip – Kriterium der Gerechtigkeit und the →Federal Cartel Office.
Bedingung des Fortschritts?, in: Rauscher,
The ARC also prohibits certain ver-
A. (ed), Kapitalismuskritik im Widerstreit,
tical restraints of trade, or those between
Cologne, pp. 89-115; GEHLEN, A. et al
(1974), Sinn und Unsinn des Leistungsprinzips,
a business and its suppliers or customers,
Munich; KAMMER DER EKD FÜR such as manufacturers and wholesalers
SOZIALE ORDNUNG (1978), or retailers. The most problematical case
Sozialethische Überlegungen zur Frage des is that of the retailer who is tied to a
Leistungsprinzips und der Wettbewerbs- resale price by the manufacturer (retail
gesellschaft, Gütersloh. price maintenance). Basically, only pub-
lished items (such as books) are exempt
Hans Willgerodt from this prohibition.
The German antitrust law is not
opposed to existing enterprises in dom-
Act Against Restraints of inant market positions in the form of
Competition monopolies or oligopolies or their
emergence through internal growth,
Cartels and other restraints on compe- but it prohibits the abuse of such posi-
tition have played a role for as long as tions. This prohibition serves to pre-
there has been commercial activity. vent the abuse of behavioural leeway
However, the implementation of com- based on power, which cannot be effec-
prehensive legal measures has been tively controlled by competition, but
slow. The first German antitrust law which harms competitors, higher or
worthy of the name was the Act Against lower economic levels, and consumers.
Restraints of Competition (ARC) If the prohibition is violated, it can also
(1958). One of the key regulations of be penalised with fines. In practice to
this law is the so-called monopolies date, the prohibition has never played
prohibition of s. 1 of the ARC. The an important role. The main reason for
prohibition concerns horizontal this is the difficulty of proving cases of
restraints of competition, which apply abuse. The courts rightly insist on
between →enterprises on the same eco- watertight proof.
82 Act Against Restraints of Competition
The general prohibition of the fulfil certain conditions. This specifical-

abuse of market power is complement- ly includes the condition that the enter-
ed by the discrimination prohibition, prises involved must have had total
which has substantial practical signifi- international sales returns of at least
cance. According to this rule, enterpris- s500,000.
es that dominate the market as well as The FCO has to veto mergers that
certain other enterprises with relative would either establish or reinforce
market power are forbidden to obstruct positions of market dominance. If,
other businesses wrongfully or to treat however, the enterprises involved can
them inequitably without material jus- prove that their mergers would result in
tification. significantly improved competitive
The ARC makes provision for conditions, they can go ahead. A merg-
merger control (the control of company er that has been vetoed by the FCO can
mergers) without authorising measures be authorised by the Federal Minister
for the re-establishment of functional of Economic Affairs if its competitive
competition in markets that have disadvantages are counterbalanced by
become concentrated through internal overall economic benefits, or if it is
growth or through past mergers. It can, overwhelmingly justified by being in
however, prevent further structural the public interest. So far, the minister
deterioration due to mergers. For con- has rightly used this option only with
trol purposes, mergers have to be regis- great restraint.
tered with the Federal Cartel Office Antitrust authorities in the legal
(FCO) prior to their execution if they sense are the FCO, the (federal) state
Turnover in percent of the six largest companies in Germany in their respective

industries, 2001–2004
Rate of concentration CR6

%
2001 2004
Mining, coal and lignite; extraction of peat 93.4 93.6

Extraction of crude petroleum and natural gas; service activities
incidental to oil and gas extraction; excluding surveying 97.5 91.0
Manufacture of food products and beverages 9.9 8.2
Publishing. printing and reproduction of recorded media 10.7 11.0
Manufacture of chemicals and chemical products 26.4 22.8
Manufacture of basic metals 24.0 25.5
Manufacture of machinery and equipment 8.7 7.9
Manufacture of office machinery and computers 70.6 79.6
Manufacture of radio, television and communication equipment
and apparatus 46.8 49.5
Manufacture of motor vehicles, trailers and semi-trailers 67.5 66.4
Recycling 48.6 50.3
Source: Federal Cartel Office, 2007

antitrust authorities and, for certain Agricultural policy

tasks, the Federal Minister of Economic
Affairs, who is essentially responsible In almost every country, agricultural
for the authorisation of mergers vetoed policy holds a special position within
by the FCO. The competence alloca- economic policy. A high degree of
tion between the FCO and the national interference with the agricultural com-
trust authorities – except for certain modities markets by the state is com-
tasks which are the exclusive domain of mon. In developing countries, agricul-
the FCO (merger control) – depends tural produce prices are frequently kept
on whether or not the effect of a below world market levels in order to
restraint of competition goes beyond make food more affordable for the
the borders of one of the states of the poorer population groups. In the indus-
Federal Republic. If it goes beyond the trialised countries, however, the goal is
Federal Republic, the European to ensure that farmers earn a sufficient
Commission has the competence to →income. There, agricultural produce
deal with larger mergers (→EU: compe- prices are typically subsidised – often
tition policy). considerably – above the level at which
The ARC is enforced by way of free markets would be expected to set-
three categories of procedures, namely: tle. At the same time, in many industri-
alised countries substantial →subsidies
• regulatory offence procedure; are paid to the agricultural sector and
the agricultural commodity markets are
• administrative procedure; and manipulated in various other ways
(→interventionism).
• civil procedure. The background for this protection-
ist bias of the agricultural policy in most
The first two are the domain of the industrialised countries is the fact that,
trust authorities; in both categories the in comparison with the overall eco-
authorities have comprehensive rights nomic growth rate, farmers’ incomes
of information and investigation. In have a tendency to remain below the
civil proceedings, private entities that income levels seen in other sectors of
have sustained losses are entitled to the economy. The reason for this lies in
claim compensation. the specific nature of the development
of →supply and demand on the agricul-
REFERENCES: tural commodities markets. The
SCHMIDT, I. (1995), Wettbewerbspolitik und demand for food, and thus for agricul-
Kartellrecht. Eine Einführung, 6th edition, tural produce, tends to grow more
Stuttgart, New York; BERG, H. (1999),
slowly than the overall economic rev-
Wettbewerbspolitik, in: Vahlens Kompendium
enue, since food represents saturation
der Wirtschaftstheorie und Wirtschaftspolitik, 2,
7th edition, Munich.
goods: the income elasticity of the
demand for food is small.
Kurt Stockmann This is expressed in Engel’s Law
(named after the Prussian statistician
Ernst Engel). When consumer income
84 Agricultural policy
rises by one per cent, the demand for trend of agricultural produce prices.
agricultural produce rises by significant- This was achieved mainly through tar-
ly less than one per cent. Simultan- iffs and similar measures, which made
eously, however, productivity levels in goods imported from abroad more
agriculture go up more (e.g. due to expensive while exports were supported
increased yields in plant and animal pro- by subsidies and, on the domestic mar-
duction), than the national economic ket, agricultural products received sub-
average. This is why the supply of agri- sidies too. Market signals were thereby
cultural produce on offer grows particu- rendered ineffectual. In many cases, a
larly fast. Thus, the rapidly rising supply surplus of agricultural produce result-
to the agricultural commodity markets ed, which would initially be left in gov-
is met by a level of demand which grows ernment storage (transitional storage).
much more slowly. The consequence is Subsequently, however, it was propped
that food prices tend to decrease (or up by subsidies and dumped on the
rather: are trailing behind the price global marketplace or it was at times
development of other goods). This puts even destroyed.
farmers’ income levels under pressure. If the world markets ran out of
In reaction to this pressure on capacity or funding for the surplus
income levels, the number of persons removal, supply would in some cases be
employed in the agricultural sector restricted by means of quotas (quantity
continues to go down. In Germany (the limitations) imposed on individual
former federal territory) in around 1950 farmers, or by the administratively
for instance, there were still about five enforced cessation of farming activities
million people employed in the agricul- in certain areas. The main political
tural sector. Today, this number has objective was thus to keep domestic
shrunk to just over 700,000 (today’s agricultural produce prices higher than
federal territory). Other industrialised they would have been had market
countries have experienced a similar forces been given free rein.
trend. This particular preoccupation with
This move away from agriculture agricultural policy was, however,
and the underlying financial pressures extremely problematical for two reasons.
are naturally accompanied by social First, the most difficult dilemma in the
problems. The extensive assistance set farming sector – a continuously growing
aside by the agricultural policy-makers supply faced with a small increase in
for the farming sector is a manifestation demand – could not really be solved in
of the desire to alleviate these social this manner. It is true that national agri-
problems by means of economic policy. cultural policy-makers could, by subsi-
While this desire is politically laudable, dising agricultural products, make
from an economic point of view the domestic farmers believe that the
choice of instruments which were tra- demand for their products was high. But
ditionally used by agricultural policy- it is obvious that, internationally, it was
makers is unsatisfactory. impossible to increase overall demand
Essentially, these instruments were using the same method. In the final
aimed at combating the downward analysis, each country tried through its
respective agricultural policy to secure a REFERENCES:
market for its own farmers, which, as a HENRICHSMEYER, W./WITZKE, H. P.

result, was lost to the farmers from other (1991), Agrarpolitik, 1, agrarökonomische
Grundlagen, Stuttgart; HENRICHSMEY-
countries. Accordingly, this agricultural
ER, W./WITZKE, H. P. (1994), Agrarpolitik,
policy, which was deployed by nearly all
2, Bewertung und Willensbildung,
industrialised countries to similar effect, Stuttgart.
led to ever more deeply entrenched
commercial conflicts. Stefan Tangermann
Second, the policy of agricultural
subsidies was not implemented where
it was needed most, i.e. at the social Balance of payments equilibrium
problems it was supposed to alleviate.
Direct grants to farmers (transfers) The legal basis for the goal of ‘balance
could have achieved this without ren- of payments equilibrium’ is the 1967
dering market forces powerless. But the Act to Promote Economic Stability and
agricultural policy-makers resisted this Growth (Gesetz zur Förderung der
political alternative for a long time since Stabilität und des Wachstums der Wirtschaft
it was feared that this type of agricultur- [StabG]).
al subsidy could make the system more Section 1 StabG specifies that
transparent and thus politically more through their economic and monetary
susceptible. policy decisions, the federal govern-
Several years ago, however, a world- ment and the federal states have to help
wide reorientation in the sphere of agri- sustain macroeconomic balance. They
cultural policy started, and many coun- are to act in such a way that, in the con-
tries began to reshape their agricultural text of a market economy, the objectives
policy. At the international level, this of →price level stability, a high level of
was entrenched through the new agri- →employment, constant and appropriate
cultural trade rules, which were agreed economic growth and a balance of pay-
during the General Agreement on ments equilibrium are realised. Since
Tariffs and Trade (GATT) negotiations these four goals cannot be realised at
held in Uruguay (1986–1994) (→inter- the same time, one refers to it as the so-
national organisations). It was hoped that called magic square.
this would appease the violent conflicts Even if at the beginning of the 21st
in the international agricultural trade century the Keynesian concept of sta-
arena. bilisation (→Keynesianism) – which was
At the national level, more and dominant at the time of the introduc-
more countries have started to reduce tion of the StabG – has ceased to be the
interference with the agricultural com- prevalent economic policy model, the
modities markets and instead to sub- StabG is still in force and unchanged to
sidise agricultural incomes by means of this day.
direct grants (→EU: agricultural policy). While, on the one hand, the balance
Thus, at present, agricultural policy of payments equilibrium is supposed to
worldwide is setting its sights on new neutralise existing instabilities in the
horizons. global economy, internal economic pol-
86 Banking system, structure and supervision
icy measures on the other hand are REFERENCES:
aimed at stabilising the domestic econ- CASSEL, D/THIEME, H. J. (1999),

omy and must not be put at risk by the Stabilitätspolitik, in: Bender, D. et al (ed),
Vahlens Kompendium der Wirtschaftstheorie und
effects of foreign economic instability.
Wirtschaftspolitik, 2, 7th edition, Munich.
A definition of the balance of pay-
ments equilibrium is difficult and con- Marcus Cieleback
troversial. Many regard it as realised
when the balance of payments is equal
to the balance of international move- Banking system, structure and
ments of capital. However, depending supervision
on the economic policy orientation, it is
also possible to aspire to the equalisa- The balancing of liquidity, which is one
tion of other components of the balance of the functions of financial institu-
of payments. tions, helps to overcome frictions in the
In its annual reports, the federal monetary flow of a national economy.
government defines the objective ‘bal- The seller and the potential buyer of
ance of payments equilibrium’ as the capital may be in different locations,
percentage share of the foreign contri- and their preferences regarding the
bution (export minus import of goods amount, the term and the risk category
and services) in the nominal gross of the investment and/or loan may dif-
domestic product (GDP) (= sum of all fer.
domestically produced and evaluated Financial institutions justify their
goods and services). existence by bringing buyers and sellers
In the past, a surplus of between of capital together indirectly, as financial
0.5% and 0.9% of the GDP was envis- intermediaries (finance middlemen),
aged. A comparison of the goal values and more cost-effectively than this
with the actual data shows, however, would be possible in the case of a direct
that this objective was only rarely contact. In the context of ‘classical’
achieved. In the present system of free deposit or credit transactions (commer-
international exchange of goods and cial banking), they offer to undertake
services and of flexible exchange rates, the transfer of cash amounts and to
the aim of a balance of payments equi- transform the terms, volumes and risks
librium is difficult to achieve. involved.
This is because the target variable, In dealing with the capital surplus
determined by the federal government and deficits of an economy, this can
as the external balance, is not easily lower the costs of identifying contrac-
influenced by economic policy actions tual partners while at the same time
since foreign demand escapes any direct making it cheaper to initiate, sign,
control and since restrictions on foreign implement and monitor agreements.
trade do not fit into a liberal system of Typical of the German economy is
international trade (→world trade order). the universal banking system. Contrary
to the situation in the United States
where until 1999 banks were subject to
government regulations, forcing them
to specialise in certain types of business Deka Bank, which specialises in pay-

(separation banking system), Germany ment transactions and bond invest-
knows no restrictions on the choice of ments.
products banks are allowed to offer. Considered together, these spe-
Regardless of this, however, and cialised institutions – which adhere to
depending on the respective legal the same legal framework as insurance
framework, a distinction must be made or capital investment companies and
between several different sectors of the building societies – become a recognis-
banking system. able group of bodies of the public law,
All four major banks with their structurally similar to the major banks
supra-regional branch networks with their headquarters in Frankfurt
(Deutsche Bank, Bayerische Hypo-und and their branches spread out all over
Vereinsbank, Dresdner Bank and Germany. Differently from the major
Commerzbank), as well as certain pri- banks, however, they function in a
vate banks, take the form of public lim- decentralised manner and are made up
ited companies. Over the past several of independent enterprises. Unlike pri-
decades, the major banks have expand- vate banks, though, the institutions of
ed their foreign business significantly this sector are expressly not pursuing
and successfully and now rank among the goal of profit maximisation.
the top financial institutions in the According to the legal regulations
world in the sectors of executive level which apply at regional level, they have
and standardised private customer busi- been officially appointed to protect the
ness (but due to the legal restructuring ‘public interest’ by ensuring that the
of private pension schemes increasingly loan requirements of the economically
in competition with the insurance weaker population groups as well as the
industry), and in the financing of large middle class are dealt with, and at the
industrial and commercial companies same time playing a balancing role with
as well as medium-sized companies. respect to regional policy and also stim-
The savings banks, on the other ulating →competition in the banking sys-
hand, are under public responsibility tem. While there are opinions question-
and do business in (single or several) ing strongly the involvement of local
cities and/or districts. Since this means government in these matters, European
that the scope of their business activities directives that came into force in 2005
is geographically limited. There are also require the regional and savings banks
the regional banks which are the prop- to do without their liability guarantee
erty of either one or more German fed- from the state or the municipality.
eral states, as well as the regional associ- The third important sector includes
ations of the savings banks. In terms of the community and Raiffeisen banks,
the subsidiarity principle, they are sup- which are organised along the lines of
posed to deal with those transactions cooperatives. In contrast to the focus on
for which individual savings banks lack public interest, cooperatives – which
the requisite size or know-how (e.g. originally started as self-help groups
foreign business). The leading institu- and where only the members of the
tion of the organisation is the DGZ cooperative could also be customers –
88 Banking system, structure and supervision
pursue a promotional task. Today, this (→globalisation), the competitive pres-

has actually come to mean that the dis- sure on the banking system in Germany
tribution of their operating profit has also increased. Thus traditional
among the members of the cooperative commercial banking is being put under
has become the priority. Their tradi- increasing pressure by investment
tional target groups were above all the banking, which is all about stocks and
private clients wanting to execute so- shares – either for the financial invest-
called bulk transactions, as well as busi- ments of private households (e.g. in the
ness clients from commerce, the trades, form of shares as an alternative to sav-
small business and agriculture. ings deposits) or for corporate finance
In the same way as official institu- (e.g. the replacement of traditional bank
tions, this sector forms a grouping con- credits by bonds) (→capital markets).
sisting of the major cooperatives and Besides technical advances (the sale
one leading institute (the DZ Bank); of financial services over the internet),
however, as a consequence of structural this preference for documented financ-
crises in the organisation, the interme- ing (securitisation) has contributed
diate level of the central bank, which is greatly to the wave of increased concen-
comparable to the regional banks, has tration of the banking system in
shrunk and there is only one institution Germany. Since 1970 when there were
left (the WGZ Bank). Apart from that, more than 8,000 independent banking
there are insurance companies, building institutions, the numbers declined to
societies and savings and investment just over 5,000 in 1980, to 4,500 in 1990
enterprises which are comparable due and to as few as about 2,300 in 2003.
to the fact that the credit cooperatives Indeed, the years 2002 and 2003 were
operate in geographically limited areas the darkest in the history of German
of business. banking since 1945. The simultaneous
Apart from these three large sectors occurrence of a destabilisation of the
relevant to the banking system, there economy and a crisis on the stock
are several smaller groupings, mostly exchange led to a financial decline and
specialising in certain types of business. the loss of 50,000 jobs in the banking
Among these are: the distinguished old sector.
private banking houses, which tradi- As in the case of the insurance
tionally look after the capital invest- industry, government regulations leave
ments of a select number of private the banking system much less room for
clients and which deal with complex manoeuvre than other industries. The
corporate finance issues; the mortgage reason for this has been attributed to
banks and building societies with their the fact that trustworthiness is a specif-
emphasis on real estate financing; for- ically sensitive issue for banks. Particu-
eign banks; and also the recently estab- larly for economically less enlightened
lished banking arms of industrial com- small-time investors – so the argument
mercial companies (e.g. VW Bank, goes – vague rumours about a bank
Quelle Bank). being in financial difficulties are
Particularly due to technical pro- enough to make them withdraw their
gress and international integration deposits. This could trigger a rush for a
place at the front of the queue in the ously rigid instructions from the finan-
bank (‘run’), which would eat up the cial supervisors, which were not linked
liquidity of that bank. As a result, the to the specific risk profiles of the var-
institution could be forced to call up ious banks. They do reserve the right,
funds from other banks, thereby gradu- however, to undertake detailed, regular,
ally causing problems for the entire local controls of the system (qualitative
banking system (domino effect). Even- supervision). In addition, Basel II stipu-
tually, the financial system as a whole lates more detailed written communi-
could be plunged into a crisis, which cations from the banks.
could lead to the loss of the retirement
savings of large sections of the popula- REFERENCES:
tion, but equally the credit supply of the SÜCHTING, J./PAUL, S. (1998), Bank
entire economy might be brought to a management, 4th edition, Stuttgart;
THIEßEN, F. et al (ed) (1999), Enzyklopäd-
halt.
isches Lexikon des Geld- Bank- und Börsen-
Since such nightmarish crisis situa-
wesens, 2 vols., 4th edition, Frankfurt/M.;
tions can never be completely excluded, HAGEN, J. v./STEIN, J. H. v. (eds) (2000),
state interference with the economic Obst/Hintner – Geld-, Bank- und Börsenwesen,
process is considered justified (→inter- 40th edition, Stuttgart.
ventionism). Through the German
Banking Act, the state puts banks under Stephan Paul
an obligation to keep financial reserves Peter T. Baltes
in the form of ‘own capital funds’ for
the compensation of losses. These
funds must be in proportion to the Basic rights, the Basic Law and
banks’ exposure (e.g. borrowers’ social market economy
default, the exchange rate or fluctuating
share prices or interest rates). The The German Basic Law (Grundgesetz)
observation of these and other rules for (constitution) formally permits any
the handling of risks is supervised by type of economic system provided it
the Federal Financial Supervisory abides by the Basic Law, in particular
Authority (→supervisory offices) in coop- the fundamental rights. The funda-
eration with the →German Federal Bank mental rights – freedom of action,
as the ‘bank of the banks’. equality before the law, freedom of
At present, banking regulations are association, freedom of movement, the
undergoing an unprecedented restruc- freedom to choose and carry out an
turing process. The Basel Committee occupation and the right to own and
on Banking Supervision – a committee dispose of private property and also the
comprising the financial controllers means of production – are incompatible
from the major industrial nations – is with a fully evolved and permanent
planning to allow financial institutions central administration economy
to consult their own risk management (→socialism/planned economy), which
and rating systems for the calculation of requires that complex economic tasks
the amount of own capital funds they and rights have to be assigned according
require. This would replace the previ- to a central plan. For the sake of this
90 Basic rights, the Basic Law and social market economy
plan, associations of independent eco- engaged in gainful employment, and it

nomic interest groups, which include can do the same for those who have
free trade unions, and the free choice of become victims of →competition or who
place of residence and occupation, have are out of work. It can also promote the
to be suppressed. integration of individuals who are able
This system is therefore a form of to work, open up opportunities offered
political dictatorship that generally does by the education system and ensure that
not grant freedom of opinion. Only a the consequences of government inter-
→market economy can guarantee the fun- ventions on the specific situation of
damental rights which safeguard free- those involved are taken into consider-
dom. The Basic Law is therefore not ation.
politically and economically neutral. In certain cases, however, the con-
The prescription of an ‘open market temporary social security and regula-
economy with free competition’ effec- tion state does protect the privileges of,
tively represents the →European Union for example, specific industries (agri-
constitutional provisions, with the con- culture, coal mining) and the owners of
sequence that the formal neutrality of jobs and housing, endangering both the
the constitution has been repealed. state under the rule of law and the mar-
At the same time, the Basic Law pre- ket economy through short-term legis-
scribes a constitutional state under the lation and interventions which do not
Rule of Law (Article 28 (1)), which conform with the system. Frequently,
(because of Article 20(1)) has often been social fundamental rights translate into
abbreviated to a social state (→social state claims for free services of a social or
and welfare state). This can be interpreted financial nature, for which, in a market
as governmental adjustments of rights economy, the state under the rule of law
and data which influence market should either not be at all responsible or
processes, as well as social and political only partially responsible (full employ-
alliances and redistributions of →income ment, jobs, education, housing and
and capital. The Basic Law thus encap- income). Thus, more social security for
sulates the two components of the some comes at the price of greater
→social market economy, i.e. a free and uncertainty for others (e.g. taxpayers).
competitive market and social security.
In relation to privileges and anti- REFERENCES:
competition restrictions, the open mar- WILLGERODT, H. (1996), Soziale

ket naturally includes certain helpful Marktwirtschaft – ein unbestimmter
elements, such as performance results Begriff?, in: Immenga, U./ Möschel, W./
Reuter, D. (ed), Festschrift für Ernst-Joachim
which are passed on in the form of
Mestmäcker, Baden-Baden, pp. 329-344;
lower prices, better product quality and
PAPIER, H.-J. (1999), Soziale Markt-
higher net compensation, as well as wirtschaft – ein Begriff ohne verfas-
offering career advancement opportu- sungsrechtliche Relevanz?, in: Nörr, K. W./
nities which do not exist in closed sys- Starbatty, J. (ed), Soll und Haben, 50 Jahre
tems. The →basic social security policy is Soziale Marktwirtschaft, Stuttgart, pp. 95-114.
able to protect those from hardship
who are not, not yet or no longer Hans Willgerodt
Basic social security The services available under the Social

Security Code II consist of services
Basic social security is considered as the aimed at securing work, and of cash
ultimate safety net of the social security payments to cover living expenses.
system. The overall aim of basic social Apart from the general services for job
security is to protect all members of creation, according to the Social
society against poverty and hardship Security Code III, is assistance for the
and to enable everyone to lead a digni- support of dependants who are under
fied life. The intention is to enable the age or in need of care, as well as coun-
beneficiaries of these services to live selling for debt, addiction and psy-
independently of assistance where pos- chosocial problems.
sible. In all states, persons capable of gain-
The basic social security system is ful employment but in need of assis-
summed up in the different volumes of tance receive normal benefits of s347
the Social Security Code and includes (since July 2007). The costs for appro-
the Basic Social Services for Job-seekers priate housing and heating as well as
(Social Security Code II), Social supplementary benefits for single par-
Assistance (Social Security Code XII) ents and handicapped persons are extra.
and the Asylum-Seekers’ Benefits Act. The regular amounts are adjusted on
All the basic social security services are the basis of the government pension
public assistance, i.e. the allocation of contributions, i.e. they are index-
the services presupposes need, and any linked. Recipients of assistance who
legal claim for these services has to be were previously in receipt of unem-
justified. The type and level of the serv- ployment pay receive an additional
ice depends on the individual case. The amount of s160 (s320 with partners)
funds come from general government plus s60 for each child, for a maximum
tax revenue. of two years. After the first year, this
Persons capable of gainful employ- additional amount is reduced by around
ment but in need of assistance are enti- 50%. This is supposed to encourage the
tled to basic social security benefits for unemployed person to take the initia-
job-seekers, while the same applies to tive and find new employment. The
persons living with entitled individuals financial incentive is increased further
in a shared household. Persons between by certain allowances which do not fea-
the ages of 15 and 65 are considered ture in the final income account.
employable, unless they are incapable, Persons incapable of gainful
due to illness or handicap, to be gain- employment who live in a shared
fully employed for a minimum of three household with persons entitled to
hours daily under the normal condi- claims, are entitled to public welfare
tions of the general job market. benefits. Up to the age of 14, the public
The primary purpose of basic social welfare benefit equals 60%, and from
security for job-seekers is to reintegrate the age of 15 up to a maximum of 25
the unemployed person into a working years it increases to 80% of the regular
life, but the beneficiary of the services is amount, as long as the children live at
expected to show active participation. home and do not work.
92 Basic social security
Persons in need of assistance who party, which are generally passed on to

are not employable or who cannot rea- social security. Persons over 65 years of
sonably be expected to take up gainful age and persons with severely reduced
employment, are entitled to public earning capacity are exempted from this
assistance in terms of Volume XII of the rule, and alimony claims from their
Social Security Code. It is considered children and parents are not considered,
unreasonable for a person to have to provided that the total annual income of
take up gainful employment if a child of the persons claiming social security does
less than three years of age has to be not exceed s100,000. This extremely
cared for, or if the care of a family generous income limit is intended to
member would be compromised. prevent an existing need for social secu-
Public assistance includes seven dif- rity being concealed for fear of recourse
ferent types of service; the more impor- by social security authorities to close
tant of these are supplementary pay- family members (so-called covert or
ments to cover living expenses, basic ashamed →poverty).
social security for the aged and, in the Social services for foreign refugees
event of reduced earning capacity, assist- occupy a special place within the basic
ing handicapped individuals to become social security system. Since 1
integrated, and assistance with nursing November 1993, social security servic-
care. The services are calculated on stan- es for asylum-seekers have been
dard regular rates which are specified by replaced by services offered in terms of
ordinance of the federal state. the Asylum-Seekers’ Benefits Act.
In July 2003 the basic rate per per- By comparison with social security,
son amounted to between s297 the entitlements of asylum-seekers are
(Baden-Württemberg and Hessen) and clearly reduced. For the first three
s282 (Thuringia, Saxony and Mecklen- years, these are basically supposed to
burg-Western Pomerania). Every five take the form of services in kind. For
years, the standard regular rates are the duration of the asylum proceedings,
adjusted to the empirically determined the basic services provide the necessary
consumer habits of the lower-income food, accommodation, clothing and
brackets (statistical model). Besides the health care.
standard regular rate, social security also The monetary value of the basic
covers the cost of accommodation and services is s184 for the head of the
heating. For certain groups of people, household, and for members of the
such as single parents, the elderly, preg- household up to the age of 7, s112, and
nant women and the disabled, lump- for household members from the age of
sum supplements of 17–36% of the 8 it is s158. These rates have been
basic regular rate are planned; for valid unchanged since the introduction of
reasons, higher amounts of supplemen- the Asylum-Seekers’ Benefits Act.
tary payments can be granted. The introduction of basic public
Prior to being awarded public assis- social security for job-seekers and the
tance, the recipient has to disclose his or revised public social security system in
her total income and all assets. This also the Social Security Act XII (Social
applies to alimony claims from a third Security Code XII) are better suited to
the complex situation of the recipients have been defined, some of which are
of assistance than was the old Federal also colloquially used. There are four
Public Assistance Act. The Unemploy- distinct concepts in accountancy:
ment Pay II for persons capable of gain-
ful employment but in need of assis- Deposits and disbursements
tance constitutes a social security serv- Each procedure which adds to the liq-
ice, which was clearly designed accord- uidity of a business (cash in hand, assets
ing to the principle of encouragement in financial institutions, cheques, etc.)
and demand. is considered as a deposit, while each
The Social Security Act II combines procedure which leads to a reduction of
financial incentives for the acceptance liquidity is called a disbursement. The
of a new job with significant penalties difference between deposits and dis-
in the event that work which has been bursements is called payment surplus
offered is not taken. Persons incapable and/or cash flow. This basic mathemat-
of gainful employment and a closely ical system forms the basis of invest-
defined circle of persons who cannot ment and finance calculation.
reasonably be expected to take on gain- Example: A company sells a product
ful employment, receive assistance to the value of s10,000 to a customer,
according to the revised version of the who pays cash instantly. The liquid
Public Assistance Act. This means that means have increased, meaning that a
public social security is obliged to assist deposit of the value of s10,000 has
only in certain exceptional cases speci- been made.
fied in the Act, but otherwise it has
largely been relieved of the cost of Receipts and expenses
unemployment. Receipts designate the financial value of
goods and services sold, while expenses
REFERENCES: designate the financial value of goods
LAMPERT, H./ALTHAMMER, J. (2004), and services received. Thus receipts
Lehrbuch der Sozialpolitik, 7th edition, Berlin; (expenses) are present if the financial
RIBHEGGE, H. (2004), Sozialpolitik,
resources (liquid means plus receiv-
Munich.
ables minus liabilities) are increased
Jörg Althammer (decreased) by means of a business
transaction. The difference between
receipts and expenses is called financial
balance.
Business accountancy: Example: A company sells goods to
Basic concepts the value of s10,000 on 1 June which
the customer receives and has to pay for
Accounting as a subsection of business by 1 July. On 1 June no deposit takes
management is understood as the place, since the liquid means have not
numerical illustration of economic facts yet increased. The company, however,
at a specific point in time. For the already has a claim against the customer
description and demarcation of stocks, on 1 June, so that a receipt of s10,000 is
debts, equity capital, etc., certain terms present.
94 Business accountancy: Basic concepts
Revenue and expenditure tain legal stipulations, in particular the

These represent the assessed goods pro- accounting regulations of the code of
duction and/or the assessed goods con- commercial law. Since company out-
sumption by the company within one siders (e.g. suppliers, banks, sharehold-
accounting period (financial year). A ers, the tax office) are also permitted
revenue is present if actual assets, i.e. access to the annual report, its compila-
the sum of financial resources and tion is considered part of the external
material property (e.g. stocks, accounting system.
machines, securities, etc.) increase. In
Germany, revenues comprise all Proceeds (performance) and costs
increases of the company’s sharehold- Contrary to the pairs of terms described
ers’ equity, while expenditures com- so far, which are predominantly used in
prise all reductions of a company’s the external accounting system, pro-
shareholders’ equity. The balance of ceeds and costs form the basis of costing
revenue and expenditures is called an and performance calculations. The
annual surplus or an annual deficit. costing and performance calculations
The two terms relate to the date of are part of the internal accounting sys-
consumption of goods and/or the pro- tem, which is not legally regulated and
duction of goods. By contrast, the can thus be tailored to the company’s
deposit disbursement calculation refers individual needs, while generally not
to the date of payment for goods being accessible to outsiders. Perfor-
received and/or to the payment receipt mance represents the assessed value of
for goods supplied. goods produced by the company during
The receipts/expenses account a certain period, costs represent the
relates to the date of purchase of goods assessed value of goods consumed,
and/or the supply of goods. while the balance is called the operating
Example: The company sells goods, result. Proceeds and revenue as well as
which the accountants have valued at expenditure and costs do not corre-
s8,000, for s10,000. A receipt at a value spond entirely. This is made particular-
of s10,000 develops. An increase of the ly clear with reference to so-called cal-
financial resources to the amount of culated costs which commonly form
s8,000 takes place, but no increase in part of cost calculations. Costs which
net assets because an equal reduction of are not offset by an equal expenditure
the material property occurs. or an expenditure of a different amount
Only the difference between the are called calculated costs, because they
higher selling price and the book value are calculated particularly for costing
represents a receipt and a revenue and performance calculations.
exceeding the existing expenditure, and One differentiates between calculat-
thus an actual increase of net assets at a ed write-offs, calculated interest, calcu-
value of s2,000. lated entrepreneurial salary, calculated
The , required by the rules of com- venture cost and calculated rent.
mercial law, is based on these calcula- Example: Calculated interest is the
tions. It has to be drawn up by compa- interest which the capital tied up in the
nies in Germany and must follow cer- running of the business would have
Business cycles 95
yielded from an alternative investment. controversial, are supposed to assist the

Not only interest on loan capital, which subdivision of the elements (growth/
must be paid, for example, for credits, is business cycle), which is didactically
taken into account, but also fictitious and methodically necessary.
interest for equity capital. While a com- In the history of economic theory,
pany’s equity capital does not actually abstract representations of economic
cost interest, it nevertheless represents a cycles of uniform shape and duration
loss of benefit when it does not yield played an important role: for example
interest since it could be profitably the division into the four phases of
invested elsewhere (alternative costs, recession, recovery, boom and down-
opportunity costs). turn, as well as the representation of
three Kitchin cycles (3.5–4 years) as one
REFERENCES: Juglar cycle (7–11 years) and of six
BUSSE VON COLBE, W./PELLENS, B. Juglar cycles as a Kondratieff cycle
(1998), Lexikon des Rechnungswesens, Munich, (50–60 years).
Vienna; COENENBERG, A. G. (2003), More recent market research con-
Kostenrechnung und Kostenanalyse, Stuttgart;
centrates on the identification of recur-
WÖHE, G. (2002), Einführung in die
ring patterns and temporal as well as
Allgemeine Betriebswirtschaftslehre, Munich;
ENGELHARDT, W. H./RAFFEE, H./WIS-
causal relationships within and between
CHERMANN, B.(2004), Grundzüge der dop- macroeconomic entities. Particularly
pelten Buchhaltung, Wiesbaden. the construction and application of sta-
tistical indicators which appear before,
Marc Richard with and after the GDP as key reference
values (e.g. orders received, utilisation
of capacity, unemployment levels) are
selected in order to examine whether
Business cycles there is a (self-replicating) pattern
between the economic parameters. If
Economic fluctuations are waves that there is, then these relationships can be
affect the economy as a whole (accord- distilled into a theory of business cycles,
ing to Gottfried Haberler, 1937). The which can be used for empirical diag-
statistically observable development of noses, prognoses and (quantitative) rec-
macroeconomic activities is usually ommendations for an effective and
made visible in the altered positive/neg- appropriate economic stabilisation poli-
ative fluctuations of the gross national cy.
product (GNP), the gross domestic This sort of statistical agreement
product (GDP) (→circular flow of (concordance) inevitably takes the defi-
incomes, national income and national prod- nitions of the concept of business cycles
uct), as well as the rate of utilisation of as its point of departure:
the production capacities. However,
these indicators are not the only param- • Business cycles are the periodic ebb
eters with which economic →growth and flow of growth rates of the gross
and its cyclic development are national income in real terms or the
explained. Several processes, all of them GDP. A modern representation of
96 Business cycles
Haberler’s concept of the wave-like (neo)-→Keynesian School (see the mul-

movement of the economy would be tiplier-accelerator models according to
referred to as a growth cycle. Paul A. Samuelson [born 1915] or John
R. Hicks [1904–1989]). But there are
• Business cycles are more or less reg- also the theories of the (neo-)classical
ular deviations from an equilibrium period (real business cycle theory).
growth rate, which is equated with An alternative categorisation subdi-
the statistical trend of the growth vides the models of business cycle theo-
rates (see the above division of the ry depending on whether they include
elements into growth and business the real macroeconomic sector of the
cycle). economy only, or both the real and the
monetary sectors (potential production
• Business cycles are the assumed dif- volume during times of utilisation to
ference between the growth rate of capacity). Regarding the purely real sec-
the estimated production potential tor of the economy, the question is
and the growth rate of the actual whether the commodity market exclu-
demand (gross national income plus sively is considered or both the com-
imported goods). One is looking at a modity and service markets.
period of economic recovery if the
potential growth rate is smaller than REFERENCES:
the demand increase. A period of eco- BARRO, R. J./GRILLI, V. (1996), Makro-

nomic downturn is characterised by a ökonomie – Europäische Perspektive, Munich,
Vienna, pp. 8-16, 402-415; KROMP-
rate of potential growth that exceeds
HARDT, J. (1993), Wachstum und
the demand increase.
Konjunktur. Grundlagen der Erklärung und
Steuerung des Wachstumsprozesses, 3rd edition,
• Business cycles are the ups and downs Göttingen; WAGNER, A. (1998),
in the rate of utilisation of the esti- Makroökonomik. Volkswirtschaftliche Strukturen
mated overall economic production II, 2nd edition, Stuttgart, pp. 293-322.
potential.
Adolf Wagner
Since the Federal Republic of Sabine Klinger
Germany came into existence, cycles of
four to five years’ duration – of which
two were years with an economic Business cycle policy
upward trend and three were years of
economic downturn – could be identi- Economic stabilisation policy or busi-
fied along the lines of the first point, ness cycle policy is a form of process
although there are exceptions to this policy that takes place within a specific
rule. (usually national) framework of eco-
Theories on business cycles that are nomic order (→institutional order policy
supposed to explain the empirically and process policy). It requires empirically
determined ups and downs differ sound knowledge of business cycle the-
depending on their basic scientific ory for a specific country and a specific
structure, which either belongs to the period in time in order to influence the
economic activity in both the short- cycles are weak, tax increases when
and medium-term. trade cycles and demand are booming).
The main goal is the stabilisation of The economic stabilisation policy
macroeconomic variables whose exces- instrument of the central bank refers to
sive fluctuations would be seen as the expansive or contractive regulation
endangering welfare and social free- of the money supply by adjusting the
dom. The preservation of economic central bank discount rate through
→growth as well as the avoidance of open market operations or a compulso-
inflation and cyclical unemployment ry minimum reserve.
are among the macroeconomic vari- Most recently, economic stabilisa-
ables and thus also the object of macro- tion inactivity is enjoying renewed pop-
economic goals. These and other goals ularity (economically neutral budget,
are politically determined and therefore laissez-faire, →liberalism). Besides con-
exogenous to ‘macroeconomic balance’. fidence in the self-regulating mecha-
Based on the fact that the individual nism of the market – reinforced in
goals often contradict one another some cases by the reliance on corre-
(trade-off) – meaning that they cannot sponding efficiency enhancing inter-
all be realised at once – one speaks of a ventions (→interventionism) – the lag
magic square. Therefore, the immedi- structure also justifies economic meas-
ate economic policy implementation ures that exercise just such a restraint
requires consideration of the objectives. towards an active state economic stabil-
The business cycle policy-makers isation policy. (Between the recognition
are usually the state (→fiscal federalism) of a problem and the time where a deci-
and/or the central banks (→monetarism). sion on what is to be done can be made,
When a problem is registered, the there is a time-lag between when the
instruments of monetary policy can measure has been implemented and
adapt to the current situation at their when the effects can be felt.)
discretion and can, depending on the The required knowledge of the
aims of the economic policy-makers causal and temporal consequence cor-
and the legal circumstances, be imple- relations between instruments and goal
mented or be subject to predetermined variables for an effective economic sta-
regulations. Business cycle policy meas- bilisation policy is documented in
ures are automatically selected and macroeconometric models, which
implemented in doses according to pre- make it possible to judge the planned
determined regulations. measures based on statistical and
The state has the option to dynamic multipliers in a simulation.
stabilise the macroeconomic demand This implies that these models are real-
anti-cyclically with business cycle poli- istic and that the structure as well as the
cy, such as spending programmes, or developmental direction of a national
with the help of a skilfully constructed economy is documented appropriately.
fiscal system by structuring the contri- The business cycle policy-maker’s real
bution amounts of the general public workday, however, does not meet these
according to the cyclical circumstances requirements: one has to be happy with
(tax reductions when demand and trade vague images of the economy and to
98 Capital markets
make decisions based on hypothetical This collecting function and period

rough structures. Thus, modesty is the transformation function are utilised by
real virtue of business cycle policy. the financial institutions too. Risks are
also spread out (diversified) and bal-
REFERENCES: anced, while at the same time any infor-
DÜRR, E. (1975), Stichwort Prozesspolitik, mation gradient between the market
in: Ehrlicher, W. et al (ed),: Kompendium der participants is levelled out. These trans-
Volkswirtschaftslehre, 2, 4th edition Göttingen,
formational steps will take place in the
pp. 95-177; MANKIW. N. G. (2001),
capital market, however, only if they are
Grundzüge der Volkswirtschaftslehre, 2nd edi-
tion, Stuttgart, pp. 773-801; WAGNER, A.
more profitable there than through a
(1994), Volkswirtschaft für jedermann. Die mark- financial intermediary, such as a bank.
twirtschaftliche Demokratie, 2nd edition, The different types of market organisa-
Munich, pp. 113-121. tion and the associated costs – for exam-
ple, for the provision of information
Adolf Wagner and processing as well as the trading of
Sabine Klinger financial products – therefore play an
important role.
Frequently, the term capital market
Capital markets is used for the longer-term segments of
the investment and/or procurement of
The capital market is the place where funds in the form of (above all) shares
the supplier and the potential buyer of and loans. Conceptually, a distinction
available capital meet. Macroecono- must be made between the (short-
mically, the task of the capital market is term) money market and the so-called
the coordination of the individual credit market (for the agreement of
investment and finance plans of the more individualised, non-tradable
economic agents. On the one hand, the financial contracts with banks, insur-
intention is to put the capital to the ance companies, etc.).
most profitable use possible while, on A share is a document that confirms
the other hand, material investments ownership of a portion of an enterprise.
are supposed to be made with the most The money paid to the enterprise
suitable type of funding (allocation through the issue (emission) in the pri-
function), in order to maximise the mary market is put at its disposal for an
prosperity of all members of society. unlimited length of time. Independ-
The capital market, just like the ently of that, the owners of the share
financial institutions, plays a transform- can trade it on, for example, a stock
ational role. The capital which flows exchange – the so-called secondary
from many smaller sources is pooled. market – which means that they own a
The large amount of collected capital piece of paper which can be liquidated
makes it possible to lend even short- quite easily (i.e. be transformed into
term capital on a long-term basis; i.e. liquid means). Its claim to proceeds
the commitment periods of the finan- (dividends) is variable insofar as it
cial sources and the recipients are not depends on the profit which was earned
linked. and distributed by the relevant enter-
Capital markets 99
prise. This means that there is a chance private portfolios was represented by
of receiving high dividends while the shares, with an added 2% through
enterprise is doing well. On the other funds; while between 1988 and 2000 the
hand, the investor runs the risk – and number of shareholders rose from 3.2
this makes a share a risky piece of paper million to 6.2 million, meaning that in
– that when times are bad no dividend 2000 one in 10 of all those older than 14
is paid and, in addition, the share price owned shares. These record numbers
can go down. have since declined somewhat – with
These dangers, however, have to be the German stock market having lost
weighed against the opportunity to half of its value between 2000 and 2004.
influence the destiny of the enterprise, The number of shareholders in 2006
which can be utilised in the context of was 4.24 million.
the annual general meeting. But only a The buying and selling of shares
few shareholders make use of this through the stock exchange takes place
option. They can delegate their right to in different segments. The shares with
vote to, for example, a financial institu- the highest turnover are quoted in the
tion where they keep their deposit of official trade; its development is reflect-
securities. ed in the DAX (German share index);
Since the mid-1990s, the financing the so-called price formation and/or
of enterprises through the stock markets signal function of the stock exchange.
has increased markedly in Germany. The new market segment for the new,
While not even 20 new companies were technology-based companies had to be
listed in 1996, the number of companies closed down after a share price collapse,
issuing shares for the first time rose to mainly due to criminal activities in
170 in 1999 and 130 in 2000, with the individual companies. Since that time –
new share value totalling some s5 bil- depending on the extent of information
lion in 1999 and s3.6 billion in 2000. published by the →entrepreneurs – a dis-
Thus in Germany, the market for share tinction is made between prime and
capital (or venture capital), which was general standard.
still in its infancy a few years ago, is While an enterprise gains access to
beginning to catch up with develop- shareholders’ equity (or its own capital
ments in the rest of the world. This is funds) by issuing shares, it can raise
helped by a greater readiness of private loan capital by issuing bonds (obliga-
investors to add shares to their portfolio. tions, debentures). They basically have
This in turn came about through a num- the same characteristics as bank loans
ber of large, high-profile share issues by but, unlike these, they can be traded on
former →public enterprises (Telecom, the the stock exchange. They document the
Post Office); this is further enhanced by right of the creditor to repayment of the
the fact that larger strata of society are capital amount borrowed by the enter-
economically better informed, and by a prise at the time of issue, inclusive of
changed attitude to risk-taking within interest at a rate which is not linked to
the ‘generation of heirs’. the company profit. This interest falls
By the end of 2002, for example, due prior to the distribution of possible
more than 5% of direct investments in dividends so that from the investor’s
100 Catholic social doctrines
point of view, bonds have to be regard- isches Lexikon des Geld-, Bank- und
ed as less risky than shares. Börsenwesens, 2 vols, 4th edition, Frankfurt/
Besides that, the capital is only made M.; HAGEN, J. v./STEIN, J. H. v. (eds)
(2000), Obst/Hintner – Geld-, Bank- und
available for a limited period. The bond
Börsenwesen, 40th edition, Stuttgart; DAI,
owner is not entitled to get involved in
DAI Factbook, DAI – German Stock Institute,
the company’s management as, unlike March 2007.
the shareholder, he does not become a
joint owner. Stephan Paul
In 2002, the circulation of securities
at fixed interest rates (annuities) as the
most important segment of the bond
market, amounted to s2.5 billion. Catholic social doctrines
Securities represent 11% of the average
private investor portfolio (added to this The economic system in the social
must be fund certificates from invest- encyclicals
ment companies, which also like to put The contemporary Catholic social doc-
some of their funds into annuities) – trine dates back to the time when the
compared to the 24–26% which go into Church was wrestling with the social
traditional investments in insurance question and when →liberalism and
companies and/or bank deposits. The →socialism were the two economic
lifting of restrictions and taxes on these theories competing for its solution.
forms of investment and the advances in While liberalism predicted that free
information technology meant that in global markets would result in the
Germany too during the 1990s, funding ‘wealth of nations’ (Adam Smith),
and investing through the financial mar- socialism (Karl Marx, Friedrich Engels)
kets gained strongly in significance. believed in the necessity of a ‘class
And yet much still has to be done struggle’ which would lead, through a
before Germany has caught up with the historical process and via the ‘dictator-
level of development of the capital mar- ship of the proletariat’, to a ‘classless
ket in the United States, where for society’ (communism).
decades a large proportion of old-age In the first social encyclical (world
pensions has had to be privately arranged circulars) Rerum Novarum (1891), Pope
and where ‘certified documents’ which Leo XIII levels harsh criticism at the
provide liquidity and good returns, such early capitalist class society of the time
as shares and bonds, are in great demand. (RN, nos 1/2). And yet, the liberal theo-
Although certified documents have ry is not rejected outright, unlike the
increased in Germany, the financial sys- programme of the socialists. It is said to
tem remains more focused on banks be a long way away from being able ‘to
than on capital markets. contribute’ something to the solution
and is actually doing damage to ‘the
REFERENCES: working classes themselves’ (RN, no 3).
SÜCHTING, J./PAUL, S. (1998), Bank Instead of liberalism, Leo XIII
Management, 4th edition, Stuttgart; demands ‘fair wages’ and a modification
THIEßEN, F. et al (ed) (1999), Enzyklopäd- of the pure market principle, and pro-
claims the freedom of coalition (free- The encyclical Centesimus Annus

dom of association) of the worker as a (1991) by Pope John Paul II forms the
‘natural right’. He demands a national closing chapter of the statements of the
→social policy in favour of the workers. Catholic social doctrine on the idea of a
He thus saw the possibility of combin- social market economy. Although the
ing the related concepts of liberty as a pope did not avail himself of this pecu-
fundamental value and the institution liarly German term, he still described
of the market with the idea of →social the issue down to the finest details of
justice in such a way that they were in a the ethical principles of a social market
state of equilibrium, which would be economy. While the terms ‘liberty’ and
able to ‘carry’ the economic system and ‘social justice’ defined the basic ethical
thus to ‘tolerate’ the tension between values, the terms ‘→market mechanisms’
liberty and social equality. and ‘public control’ described the two
This is the exact starting point of the fundamental organising elements.
social market economy which was sub- ‘Good employment opportunities’ and
sequently set down by Walter →Eucken a ‘solid system of professional and social
and Alfred →Müller-Armack. It is also the security’ stressed the special protection
very topic of the second papal social of human labour and of those who are
encyclical Quadragesimo Anno (1931) 40 socially weak. The elements ‘stable cur-
years later. Despite all the criticism of rency’, ‘healthy economic growth’ and
specifics, the ‘capitalist way of running ‘security of social relationships’ were
the economy cannot be condemned as also mentioned. At the same time, a
such’. The point is, rather, ‘to organise it →market economy which lacks a legal
properly’ (QA, no 101), because framework, which is untamed and
‘unhampered competitive freedom’ can devoid of values, was rejected (see CA,
easily lead to ‘the survival of the fittest, no 19, 40-42).
who all too often tend to be more brutal
and lacking in conscience’ (QA, no 107). Principles of social ethics
Competitive freedom alone must According to the most important sen-
never be made the ‘principle which reg- tence in the Catholic social doctrine,
ulates the economy’. On the other the ‘origin, carrier and goal’ of all social
hand, it is ‘justified and of undoubted processes always has to be the person.
usefulness within the necessary limita- To that extent, he or she also has the
tions’, provided it is ‘firmly controlled right and the duty to look after his or
and wisely governed’ by the public wel- her economic affairs with liberty,
fare authority (QA, no 88). The pope responsibility and solidarity.
also criticised the unfair distribution of A successful economy – understood
wealth at the time (QA, no 60) and as the best possible supply of goods for
recommended the transformation of all in an atmosphere of liberty and social
the wage-for-labour relationship into a justice – first of all requires the institu-
‘business relationship’, so that workers tion of the market. The fundamental
and employees can achieve ‘co-owner- rights of freedom of production and
ship or co-management or some sort of consumer liberty, the free choice of
profit-sharing’ (QA, no 65). occupation and of a workplace, and the
102 Catholic social doctrines
autonomous handling of →property in all diction, serve this purpose. The third
its forms can be satisfactorily realised goal is the solidarity with the ‘economi-
only by a free market order. This makes cally weak and the economically pas-
the market, as the institution of econom- sive’, as it was systematically developed
ic self-determination, the system’s polit- through the ‘system of social security’.
ical consequence of the basic value of Today, the ecological compatibility and
liberty. For a Christian anthropology to the ‘global economical reasonableness’
defend a free market system, is the nec- of a fourth goal – ‘renewed social mar-
essary consequence of its view of human ket economy economic processes’ –
beings as free, responsible subjects. have to be taken into account as a new
A successful economy, however, ethical goal of a social market economy.
cannot be achieved through the institu- The goals of a social market econo-
tion of the market alone. Since not my cannot be reached through →com-
nearly every human being ‘can prosper petition alone, but only through a basic
in the market’, the public welfare legal framework which is instituted by
authority and its ‘social balancing’ insti- the state and within which the market
tutions have to ensure that all society process plays itself out.
members are at least provided with The Christian image of humans
those material goods which enable stresses both the liberty and the autono-
them to lead their lives with dignity. my of the person as well as the fact that
This criterion sets the social market all people have equal dignity. The con-
economy apart from the individualism cept of ‘social justice’ as equality born
of the pure barter economy of the era of out of solidarity, is possible only to the
palaeo-liberalism (→liberalism). extent to which liberty, autonomy and
self-interest – which is ever present – can
Old and new goals unfold. Only in that way can an econo-
The original theory of the social market my generate the sort of productivity that
economy knows three ethical goals. The makes prosperity and social equality pos-
first and most important of these is an sible. Over time, the social market econ-
optimal goods supply, which can be omy and the social security state associ-
achieved only when the economic ated with it have brought about an enor-
agents enjoy the freedom that forms the mous redistribution – one that is respon-
basis of their economic creativity. The sible for the allocation of one-third of
second economic goal is the guarantee the national product. There is, however,
of decent conditions in the workplace. the danger that the inherent link
While classical liberalism sees even the between personal achievement and the
labour market as exclusively subject to social efficiency of the social market
the law of supply and demand, Leo XIII economy may fall into oblivion.
(Rerum Novarum) already envisaged a Gradually, an ‘insurance-against-all-risks
framework of public legislation for a mentality’ that considers the ‘compre-
‘reasonable minimum level of protec- hensive supply’ to be normal at all times
tion of human labour’. Today, the indi- has started to take hold.
vidual and collective industrial law, and The combination of increasing eco-
also a specific independent labour juris- nomic →globalisation with a continually
Chamber system 103
ageing society means that the relation- (2001), Subsidiarität, Solidarität und
ship between expenditure and returns Gemeinwohl als ‘Baugesetze der Gesell-
must be ‘re-set’. The service base of our schaft’, in: Fortbildung des Arbeitsrechts nach den
Grundsätzen der Subsidiarität, Solidarität und
welfare state that is based on the sub-
Gemeinwohl, Munich; SCHÜLLER, A.
sidiarity principle has become too nar-
(1997), Die Kirchen und die Wertgrundlagen
row to be able to continue holding up der Sozialen Marktwirtschaft: in: Soziale
the social superstructure in the same Marktwirtschaft: Anspruch und Wirklichkeit seit
way. We therefore need to change our 50 Jahren, Ordo, 48, Stuttgart, pp. 227-255.
course in the direction of more person-
al self-help, socially organised solidarity Lothar Roos
and economic autonomy.
Under today’s conditions the ques-
tions that have to be repeated include:
Which solidarity services are indispen- Chamber system
sable for dignity’s sake and for the sake
of the social rights associated with it?’ Chambers are generally based on the
And which previous social security principle of autonomy. Autonomy
benefits should partly be replaced by means that the members of a self-gov-
reasonable personal contributions? erning corporation accept sole respon-
If anyone wants to prevent this sibility for their affairs and deal with
debate (→types of market economy) in the them independently. First initiated by
name of a misunderstood ‘social jus- the Stein-Hardenberg reforms at the
tice’, the result will be that everybody beginning of the 19th century, autono-
loses out. A transformed social market my is an important organising principle
economy therefore includes, above all, of democratic states.
an emphasis on the subsidiarity princi- Autonomy carries special signifi-
ple according to which each individual cance for regional government authori-
not only has the right but also the duty ties (municipalities and municipal asso-
to do all that he or she is capable of ciations) whose right to self-government
doing. This applies to integration in the is constitutionally guaranteed in Article
job market, the acquisition of knowl- 28 of the Basic Law. In this way, the citi-
edge and education, and the ability to zens are encouraged to become more
accumulate assets and to make financial involved in public administration.
arrangements for their retirement and Apart from municipal autonomy,
times of need. there is economic autonomy, autonomy
of the professions and social autonomy.
REFERENCES: Bodies responsible for economic auton-
RAUSCHER, A. (1985), Katholische Sozial- omy are the → chambers of commerce and
lehre und liberale Wirtschaftsauffassung, in: industry; for the professions, for exam-
— (ed), Selbstinteresse und Gemeinwohl, Berlin,
ple, the physicians’ chambers, legal
pp. 279-318; ROOS, L. (1999), Ethische
chambers and architects’ associations;
Grundlagen und Zukunft der Sozialen
Marktwirtschaft, in: In christlicher
for social autonomy, the social security
Verantwortung. 50 Jahre Bund, Katholischer system. The following organisational
Unternehmer, Frankfurt/ M., pp. 69-91; — principles apply to all chambers:
104 Chambers of commerce and industry
• They are bodies of the public law, i.e. Chambers of commerce and
they have been legally instituted by industry
the state and they have been entrust-
ed with the responsibility for certain German chambers of commerce and
tasks. industry are corporations established in
terms of the public law and are thus the
• The law specifies who belongs to the official representatives of the commer-
chambers as (compulsory) members cial sector of the economy in its deal-
(e.g. all business people, all trades ings with the state. Regional chambers
people, all physicians, etc.). of commerce and industry look after
→enterprises of all sizes.
• Through their own contributions, the A total of 3.5 million enterprises are
members of the chambers raise the grouped together in members’ associa-
funds required to fulfil their objection of the chambers of commerce and
tives and they supervise the appropri- industry in Germany. The membership
ate and economical use of these funds. of all commercial enterprises in the
chambers of commerce and industry
All self-governing corporations typ- guarantees that each enterprise can
ically have representatives who have exercise equal influence. There is no
been elected by the members and who weighting of votes with majority deci-
have been accorded significant rights to sions according to size; each enterprise
participate in the appointments for the has an equal right to vote. This repre-
highest and honorary offices, as well as sentation of enterprises has the effect of
with the determination of the budget balancing the interests of enterprises
and decision on fundamental issues. and industries.
The state establishes the chambers The members of the chamber
in order to benefit from their expert (enterprises) elect their representatives
knowledge so that appropriate local and to the chamber’s plenary assembly,
national tasks are undertaken, and in which elects the president, the vice-
order to reduce the load on its own president and the managing director of
administrative mechanisms. The cham- the chamber. This means that the pres-
bers are also an extension of the sub- ident of a chamber also has to be an
sidiarity principle, in terms of which entrepreneur. Since most representa-
smaller units (e.g. the family or a tives come from enterprises which
municipality) should settle their affairs belong to the middle class, the cham-
themselves and call on the support of bers of commerce and industry are par-
larger units (e.g. a state or a federation) ticularly focused on the needs of this
only if the involvement of higher group. The fact that membership of
authorities is required for the successful regional chambers of commerce and
undertaking of a particular activity. industry is compulsory, allows them to
remain independent of government
Hans Werner Hinz subsidies and secures their objectivity
and reliability when they have to give
political advice.
The task of the chambers is to pro- Another important characteristic is the

mote regional commerce and industry. cooperation between full-time staff and
The preparation of reports – on some the 250,000 odd voluntary staff mem-
200 different areas of expertise – for bers who have business backgrounds
courts, authorities and private petition- and who are active in chamber organi-
ers is of particular importance, since sations and committees.
they are prerequisites for trading and Selected examples of what the
professional licences. chambers of commerce and industry
The chambers are particularly keen information service can achieve are the
on the promotion of the education sys- Business Start-up Forum, the company
tem and on the improvement and effec- information system (for the exchange
tiveness of in-house training and fur- of suppliers’ and manufacturers’
ther education systems. Their advisory details), the e-trade centre as well as the
role towards companies that take in Technology and Recycling Forum.
trainees, their apprentice-mentoring The umbrella organisation of the
scheme, and the involvement of more German chambers of commerce and
than 120,000 honorary examiners in industry is the Association of German
examinations, commit the chambers to Chambers of Industry and Commerce,
lending the skills-training sector their which employs more than 160 staff
continued structural support. members at its headquarters in Berlin.
It is hoped that in this way a quali- The association represents the interests
fied workforce will bring competitive of the individual chambers in its deal-
advantages and that long-term market ings with the federal government,
positions will be able to be established issues press releases and statements on
and evolved. In the area of →environ- topical issues in the realm of politics
mental protection, statements by the and the economy, and assists interested
chambers of commerce and industry parties with the establishment of inter-
generally serve the purpose of modify- national contacts. The chambers set the
ing environmental policy measures in guidelines for the association and
the interests of industry and commerce. finance its activities.
Altogether the chambers offer their The growing importance of the
member enterprises a broad range of organs of the →European Union in the
information and services aimed at mak- field of economic and social policy has
ing their businesses structurally more necessitated the establishment of a
efficient and improving their market transnational lobby which can deal with
position. A total of 6,600 experts are European policy issues on behalf of
responsible for the area-specific support commerce and industry. This role has
of the enterprises in the chambers. been adopted by Eurochambres in
Innovative economic trends as well as Brussels in its capacity as the umbrella
practical business activities are brought organisation of more than 800
to the enterprises’ attention in regularly European chambers, which in turn look
edited chamber publications – there after 10 million enterprises.
are, for example, a total of 79 different The Association of German
magazines totalling 2.5 million copies. Chambers of Industry and Commerce
106 Circular flow of incomes, national income and national product
coordinates the 120 bilateral foreign working on a model of the national

trade chambers of commerce in 80 economy in cycle form. Typical of this
countries. These bilateral chambers are form of representation is a network of
the first dialogue partners for German circulatory nodes, which take on the
or foreign business people. role of functional and institutional
transactors.
REFERENCES: The functional transactors are usu-
DIHT – DEUTSCHER INDUSTRIE – ally markets (changing capital assets),
UND HANDELSKAMMERTAG (ed) and the institutions are sectors of the
(2000), Industrie- und Handelskammern in der
economy (the government, private
Bundesrepublik Deutschland: Aufgaben und
households, enterprises and possibly
Gesetz, Bonn; — CHAMBER OF COM-
MERCE AND INDUSTRY – das Leitbild
other countries). The interactions
der Marke, Bonn; — (2006), Kammerrecht, between the circulatory nodes are rep-
Bonn. Internet: www.verlag.dihk.de resented by currents, with each goods’
current being paired with an equivalent
Dagmar Boving monetary counter-current (e.g. con-
sumer goods from enterprises to house-
holds, consumer expenditure from
households to enterprises).
Circular flow of incomes, national The operational pattern of the cir-
income and national product cular flow of incomes rests on the fun-
damental idea that income is obtained
The idea that money changes hands, through expenditure (and not vice
circulates and, perhaps, forms a cycle is versa), and that the conditions for the
based on everyday experience. Inspired repeatability of this circulatory process
by scientific discoveries on the circula- depend on this.
tion of blood and water, 18th century This is the main focus of cycle analy-
economists were the first to see the pos- sis, which investigates the equilibrium,
sibility of representing economic structure and level of the economic cur-
processes as a cycle. rents and existing stock in the cycle, and
The first cycle theoretician was also the resulting behaviour of the eco-
François Quesnay (1694–1774) who, nomic agents (ex ante cycle analysis).
besides his duties as personal physician The circular flow of incomes serves as a
to the Marquise de Pompadour at the theoretical model for the national
Court of Louis XV at Versailles, dedicat- accounting in an economy.
ed himself to studies on philosophy and The interdependence of the compo-
economics. Quesnay tried to show how nents of the cycle means that this book-
the landowners’ annual capital advances keeping system has three different ways
can be recovered through agriculture of calculating the national product. The
and trade, so that they become available output method, the incomes received
again in the following year. method, and the consumption-savings
In the next century, Karl Marx method taken together add up to an
(1818–1883) and after him Eugen von algebraic representation of the circular
Böhm-Bawerk (1851–1914) were flow of incomes.
Circular flow of incomes, national income and national product 107
The ‘consumption-savings method’ incomes from other countries (income

indicates how the economic units earned at home which is transferred
spend their →income and how manufac- abroad, minus the income that was
tured goods are used in one period: pri- obtained abroad and was transferred
vate households and the state consume, back home) and via the →subsidies and
private →enterprises and the state invest. production and import duties within the
In an open national economy, the exter- European Union, become mutually
nal balance (the surplus of exports over exchangeable. The difference between
imports) also counts. gross and net entities determines the
The ‘output method’ shows the level of depreciation. Finally, govern-
relationship between production and ment interventions in the form of direct
income. The overall result is the sum of taxes and subsidies distort the original
the gross values added (gross produc- factor costs and thus the actual market
tion value less the costs of what had to prices so that, strictly speaking, the
be used in the production process) of appropriate evaluation basis should be
the individual businesses and the state. indicated for each aggregate.
The ‘incomes received method’ ini- The widely used concept of nation-
tially determines the national income al income can now be translated into
and shows how the factors of produc- the terminology of macroeconomic
tion used in the manufacturing process interdependence: the issue is net
(labour, capital, land) participate in the national income at factor cost.
final income. It must be roughly subdi-
vided into the gross wages and salaries REFERENCES:
for employees and into profits for the MEIER, R./REICH, U.-P. (2001), Von
self-employed and factor capital Gütern und Geld, Kreisläufen und Konten: eine
Einführung in die Volkswirtschaftlichen Ge-
(income from entrepreneurial activity
samtrechnungen der Schweiz, Bern, Stuttgart,
and capital assets). The income distrib-
Vienna; STOBBE, A. (1975), Stichwort
uted by the market in this way is usual- Wirtschaftskreislauf und Sozialprodukt, in:
ly subject to a secondary distribution Ehrlicher, W. et al (ed), Kompendium der
through the national tax transfer system Volkswirtschaftslehre, 1, 5th edition,
and is then available for use – this is how Göttingen, pp. 16-56; WAGNER, A. (1998),
the circular flow of incomes closes. Makroökonomik. Volkswirtschaftliche Strukturen
Sophisticated methods of calculation II, 2nd edition, Stuttgart, pp. 48-80.
produce different varieties of national
product. Besides gross national income Adolf Wagner
(GNI) (which used to be referred to as Sabine Klinger
gross national product – GNP), gross
domestic product (GDP) plays an
important role for economic stability Co-determination
(→business cycles, →business cycle policy).
The difference between the two vari- Co-determination is the participation of
ables is due to the application of the the workers in the decisions of their
home and/or the domestic concept →enterprise. Depending on the form and
which, via the balance of the factor size of the enterprise, the participation
108 Co-determination
rights of the workers differ. In the min- The extent to which the workers
ing as well as the iron and steel industries can exercise co-determination depends
(Montan Co-determination), workers on the legal form of the enterprise. It is
have the most extensive rights to co- most visible in the case of public limit-
determination: here, the supervisory ed companies where the supervisory
boards have equal numbers of employ- board is in control of the board of direc-
ers’ and workers’ representatives (pari- tors: the appointment of the executive
ty); in addition, the appointment of the committee is incumbent upon the
labour relations manager requires the supervisory board and not the general
approval of the majority of the workers’ shareholders’ assembly. This ensures
representatives on the supervisory board. that the supervisory board can influ-
Other large-scale incorporated ence the board of directors on an ongo-
enterprises (corporations such as public ing basis, which for its part is exclusive-
limited companies, limited partnerships ly accountable to the supervisory board.
by shares, limited liability companies, In the case of a limited liability com-
mutual insurance companies and coop- pany, provided that it is large enough to
eratives) with a minimum of 2,000 require co-determination, the executive
employees also have to have an equal directors are equally appointed by the
number of workers’ and employers’ supervisory board, which is itself
representatives on their supervisory accountable to the partners – and thus
boards with the proviso that, in the case the shareholders. This means that in
of a deadlock, the employers’ side has limited liability companies, the com-
the final say. In addition, employees in mittees with co-determination rights
managerial positions have representa- have only limited influence.
tion in the workers’ quota. In medium- In comparison with other countries,
sized enterprises with between 500 and German co-determination law is very
2,000 employees, the workers are entitl- comprehensive. Historically, co-deter-
ed to a one-third representation on the mination – above all in the mining, iron
supervisory boards. and steel industries – represented an
Non-incorporated firms (private alternative to the nationalisation which
firms, general partnerships, limited is discussed elsewhere and which was
partnerships) are not subject to co- hotly debated after the Second World
determination regulations. The same War. Capital and labour were to be insti-
applies to government enterprises, tutionally integrated and forced to coop-
where special legal regulations for the erate. And it is true that in Germany a
representation of employees in the culture of partnership between employ-
administrative councils are applied. ers and employees developed.
Co-determination refers to all deci- For many years now, conflicts of
sions that have to be taken by an enter- interest have been almost exclusively
prise’s supervisory board. This has to be dealt with in a climate of social harmo-
distinguished from the participation of ny: industrial action is less frequent,
the works council in terms of the shorter and usually less irreconcilable
industrial relations law, which exists than it is in comparable industrial
alongside co-determination. nations. As a result, workers are in a
position to partake in the increasing ing and remuneration conditions inde-

prosperity. It is thanks to the concept of pendently of government directives and
the →social market economy that the eco- in their own responsibility. This is done
nomic system was accepted virtually mainly through collective agreements
from the start. In the meantime, howev- that can refer either to a single →enter-
er, the traditional division between cap- prise or to an entire industry.
ital and labour is becoming increasingly The area of application of these
blurred: an ever-increasing number of agreements can be limited to a specific
workers have become shareholders region or cover the Federal Republic as
either in their or in other enterprises. a whole. Collective agreements may
In view of the increasing interna- specify the actual rights and obligations
tionalisation of the economy (→globali- of workers and employers – such as
sation), the criticism has repeatedly been regarding wage levels or working hours
raised that the German co-determina- – but they may also contain legally
tion law is beginning to turn into a loca- binding standards, which for those con-
tional disadvantage; it complicates deci- cerned are directly valid and as such
sion-making processes and decreases similar to a law. They concern all
profitability. However, co-determina- employers in the area of application
tion enables the workers to identify with membership in the respective
better with company objectives. Thus, employers’ association, and all employ-
the criticism is usually less targeted at ees who belong to the participating
the underlying idea than at certain trade union. But it is normal practice to
forms of co-determination. allow non-aligned workers to share in
the outcome of collective agreements.
REFERENCES: Collective agreements regulate
WLOTZKE, O./WIßMANN, H./ KOBER- working conditions collectively and are
SKI, W. (2002), Mitbestimmungsgesetz, 3rd edi- regularly brought in line with new eco-
tion, Munich; BERTELSMANN-STIF-
nomic developments. This means that
TUNG/HANS-BÖCKLER-STIFTUNG
the individual clauses of employment
(1999), Mitbestimmung in Deutschland Tradition
und Effizienz, Frankfurt/M.; NIEDEN-
contracts do not have to be renegotiated
HOFF, H.-U. (2000), Mitbestimmung in der every time. Thus collective agreements
Bundesrepublik Deutschland, 12th edition, play an important logistical role. They
Cologne. also have a protective function for the
Gernot Fritz individual worker facing an employer,
who is usually in an economically
stronger position. But collective agree-
ments also protect the individual
Collective agreements employers who, when faced with the
organisational power of a large trade
Article 9(3) of the German Basic Law union, would achieve little on their
guarantees bargaining autonomy: work- own. Lastly, collective agreements play
ers and employers have the right to club a peace-making role when, over long
together in trade unions and employers’ periods of time, they keep the work-
associations, and to organise their workplace free from exhausting conflicts.
110 Collective agreements
While industry-wide agreements on collective agreements. Such company

conditions of employment usually agreements may deviate from collective-
remain valid for longer periods, wage ly agreed regulations only when they are
and remuneration agreements have to in favour of the workers – unless an
be amended more frequently, with ‘opening clause’ in the collective agree-
terms that make it easier to monitor ment specifically grants the right to
developments. But there are many more exceptions.
collective agreements on additional ben- Attempts to influence collective
efits such as entitlement to vacation, agreements through industrial action
payments for the purpose of wealth are permissible. The right to →industri-
accumulation or irregular payments. al action is guaranteed in Article 9 of the
These collective agreements apply Basic Law. Its details have nevertheless
simultaneously and usually for different not been legally regulated, but are based
lengths of time. At present, more than on precedents. A strike is an example of
50,000 collective agreements are in industrial action and is defined as the
force. joint refusal to work with the intention
Collective agreements cannot over- of achieving a collective agreement by
rule any laws or regulations. A deviation force. A lockout is the employers’
from the national minimum standards answer to a strike; it means that work-
is in theory permissible provided, how- ers are not allowed access to the work-
ever, it is in favour of the workers. place and are refused wages. Both the
Works councils are empowered to trade unions and employers’ associa-
finalise company agreements but not tions lay down procedural rules that
Percentage of employees in Germany with binding wage agreements, 1996–2006

apply in the event of industrial action, and if more than half of the workers in
such as a call for a strike ballot on the the area of application of the collective
workers’ side, or an appropriate joint agreement are working for employers
resolution on the side of the employers. who are aligned.
Any kind of industrial action is Minimum wages, which have not
required to adhere to the rule of pro- been legally specified in Germany, can
portionality at all times. Equally, be achieved only via the detour of uni-
nobody can be made to participate in a versally binding collective agreements.
labour dispute by force. Industrial But to declare collective agreements
action can relate to any aspect of tariff universally binding is legally and politi-
negotiations, but selective strikes cally controversial because they also
restricted to individual companies are place an obligation on employers who
also allowed. While industrial action is openly state that they do not wish to be
taking place, the workers and compa- aligned with tariff negotiations. A judg-
nies involved usually receive financial ment of the Federal Constitutional
support from their associations. Court has, however, declared them per-
In principle, industrial action may missible. Collective agreements regu-
be taken only when the truce has late minimum requirements. They do
expired after an existing collective not prevent anyone from granting
agreement has come to the end of its workers benefits that are above the col-
life. Short token strikes in close associa- lectively agreed wage limits. Benefits
tion with collective bargaining are, that are above the collectively agreed
however, considered admissible. But wage limits can be granted either
industrial action is illegal if it is a politi- through company agreements or
cal strike whose target is the legislator. through a single contract.
Meanwhile, the initial controversy over
the validity of lockouts has been REFERENCES:
resolved by a judgment of the Federal GAMILLSCHEG, F. (1997), Arbeitsrecht.

Constitutional Court and the Federal Kollektives Arbeitsrecht, Munich; WIED-
MANN, H./ STUMPF, H. (1999), Tarif-
Labour Court.
vertragsgesetz; Munich; HALBACH, G./
A collective agreement can some-
POLAND, N./ SCHWEDES, R./
times be extended to workers and WLOTZKE, O. (1998), Übersicht über das
employers who are non-aligned, pro- Arbeitsrecht, 7th edition, Bonn.
vided that the collective agreement was
declared universally binding. This Gernot Fritz
applies at present to fewer than 600 col-
lective agreements. In order to be
declared universally binding, an appli-
cation from at least one of the parties to Competition
the collective agreement and a vote in
favour by a wage committee where Competition means people fighting
both parties are equally represented are over something. Economic competition
required. It is furthermore permissible exists in the rivalry for business deals.
only if there is interest from the public In order to be successful in the market,
112 Competition
suppliers and bidders have to offer their But competition also has economic
business partners favourable trading functions. First, competition requires
conditions. These depend equally on that a finished product has to suit the
attractive prices (price competition), needs of the customer as closely as pos-
high product quality (quality competi- sible (focus on consumer demands).
tion), the right approach to sales and Second, in order to maximise profits the
marketing, and possibly also on suc- scarce factors of production – labour,
cessful advertising. land and capital – are used in such a way
In a →market economy, competition that their productivity is highest
fulfils a number of important tasks. (decreasing factor costs). The third
These are listed as the different func- point is that the income distribution
tions of competition (see box below). First taking place is a function of one’s per-
and foremost, the power of the state ver- formance in the market process – i.e.
sus the private citizen needs to be what sort of contribution is made to
restricted. Different from a planned overcoming the scarcity of goods
economy (→socialism), the economic (income in accordance with market per-
process is not mainly controlled by the formance). Fourth, competition sends
state but directly by the private actors in out incentives for the introduction of
the economy (the controls inherent in new or improved products and produc-
the market economy on the basis of tion methods (incentive to be innova-
liberal economic rights). Secondly, com- tive). Fifth, competition accelerates the
petition controls the economic power of speed at which competitors react to such
private actors. Only those whose busi- innovations or other changes in the eco-
ness conditions are permanently attrac- nomic environment (e.g. changes to
tive have the chance to be successful international trade relations) and thus
(competitive self-check). These two contributes to making the innovation
functions of competition are socio-polit- known to the entire economy (imitation
ically important and are therefore of innovations and general high flexibil-
referred to as ‘classical political func- ity of the economy).
tions’. The first three functions are called
Competition and its functions in a market economy
Classical political functions of competition

• Limiting the impact of state power on the private citizen
• Control of private economic power
Static functions of competition

• Composition of the goods supply according to consumer needs
• Optimal utilisation of factors of production
• Income distribution according to market performance
Dynamic functions of competition

• Innovative products and production methods
• Imitations and a high degree of adaptability
Competition 113
‘static competition functions’, because in different markets. The situation is

they work particularly well when the completely unproblematical if new
economic indicators are static. In con- suppliers (potential competitors) can
trast, the fourth and fifth functions are enter a market at any time, i.e. if the
referred to as ‘dynamic competition market has low entry barriers and is
functions’ because they take into ‘open’. Here, the current suppliers can-
account overall economic changes over not successfully restrict competition
time, consumer needs, the available fac- and, for example, raise prices, because
tors of production, the technical and they would otherwise be quickly dis-
organisational knowledge of how to empowered by new market entrants
combine the factors of production (newcomers). In this case, a special
(→production and supply), as well as the competition policy is not necessary
legal and the →social system within (→open markets: market entry, market exit).
which the competition takes place. In reality, however, potential suppli-
Beyond that, innovative suppliers in ers to the market are often hampered by
their constant search for profit opportu- economic barriers – and sometimes also
nities are also a source of change. by legal barriers – which are difficult to
Through competition, they have to test overcome. It is then important to main-
whether their new ideas are actually tain the rivalry between the current
suited to need satisfaction. The truth is suppliers: the competition policy must
that only the most successful new prevent these suppliers from entering
developments are rewarded with high into restrictive contracts, for example,
→profits (competition as a process of in the form of monopolies or mergers.
search and discovery). Even if there are a great many enter-
The more successful an adventur- prises in the market (polypoly), compe-
ous pioneer-entrepreneur is, the more tition could be eliminated to the detri-
pressure others will feel to catch up ment of the consumer.
with his or her competitive advantage But competition is even more at risk
or even to overtake him or her. This if there are only a few enterprises in the
may be based on the hope of being able market (wide oligopoly). They may dis-
to participate in the innovator’s suc- pense with contracts altogether and
cesses. There is, however, always the agree trading conditions jointly and
fear of not doing enough and of having severally, through informal telephone
to quit the market. calls or conferences which are open
At the same time it is plausible that only to the industry. If the number of
market participants will try to ease the suppliers becomes smaller still, all other
constant competitive pressure by means things being equal, the enterprises may
of restrictive cooperation with other even exhibit solidarity without any pre-
→enterprises, or by seizing individual vious contact whatsoever (close oligop-
control of the market. Without a pro- oly). In that case, if one supplier
tective governmental policy, therefore, increases prices, the others follow suit
the competition process could be rapid- ‘spontaneously’. The enterprises be-
ly suffocated. It also has to be consid- have like a quasi-monopoly. Excep-
ered that competitive conditions differ tional cases may force the government
114 Concentration
to intervene by changing the market the readiness of the market participants

structure and increasing the number of to perform will decline, undermining
suppliers. This may be done, for exam- the control function of competition.
ple, by making it easier for newcomers Finally, the state tries to flatten
to gain access to the market or, in extreme economic fluctuations which
extreme cases, by breaking up the estab- do occur when competition is given
lished enterprises in order to resuscitate free rein. The specific targets here are
competition. full →employment, →price level stability,
Even if, due to its functions, compe- →balance of payments equilibrium and eco-
tition makes an important contribution nomic growth.
to social prosperity, it nevertheless can-
not fulfil all the requirements of a mar- REFERENCES:
ket economy (the limitations of compe- BARTLING, H. (1997), Von der

tition). This is why the government Wettbewerbstheorie zur Theorie der
Wettbewerbspolitik, in: Kruse, J. et al (ed),
complements competition with its eco-
Wettbewerbspolitik im Spannungsfeld nationaler
nomic policy. Apart from the policy
und internationaler Kartellrechtsordnungen,
against restraints of competition (→Act anniversary publication for I. Schmidt, 65th
Against Restraints of Competition), it is of birthday, Baden-Baden, pp. 17ff;
primary importance that regulations for SCHMIDT, I. (2001), Wettbewerbspolitik und
those sectors of the economy are put in Kartellrecht, 7th edition, Munich; WOLL, A.
place where competition has no chance (1992), Wirtschaftspolitik, 2nd edition,
of success. This applies especially to the Munich.
supply of public goods by the state (e.g.
internal and external security). In addi- Hans Peter Seitel
tion, the state can correct – through, for
example, environmental policies –
detrimental developments due to com- Concentration
petition, making sure that third parties
do not suffer negative external conse- The →social market economy, which is the
quences. accepted way of life in Germany and
Next, it has to be taken into account enjoys majority support, can only func-
that the income distribution which tion if economic and political powers
results from the market process reflects are not excessively concentrated and
the market performance of the individ- thus out of control. Only in this way
ual participants in the economy, with- can socially relevant political and eco-
out necessarily paying attention to their nomic decisions be made and imple-
neediness. For this reason, the state mented in an essentially decentralised
undertakes to correct the income distri- manner.
bution – for example, in favour of ill or The most important aspect of the
disabled persons as well as families with problem in terms of market and com-
children (→social policy). However, the petition criteria is enterprise concentra-
greater the deviation from a →distribution, which depends on the number of
tion in accordance with market per- →enterprises operating in a market.
formance, the greater is the danger that From the point of view of competition
Concentration 115
– or considered more generally in terms tain criteria have to be registered with

of the goals of a social market economy the →Federal Cartel Office prior to their
– enterprise concentration can be seen execution.
either in a positive or a negative light. It The main criterion is that the enter-
must be seen as positive if it is thanks to prises involved must have had total sales
the concentration that an enterprise revenues of more than s500 million
manages to remain competitive and during the past financial year world-
profitable and offers secure jobs. A neg- wide, and at least one associated enter-
ative evaluation is appropriate if there is prise in the same country must have
actually only one enterprise on the sell- made sales revenues in excess of s25
er’s or the buyer’s side. In such monop- million.
oly situations →competition cannot work In terms of the Act Against Restraints
and achieve the desired results. For this of Competition, such mergers are gener-
reason, modern antitrust legislation ally not permissible if they either justify
envisages rules designed to prevent an or strengthen a dominant market posi-
excessive enterprise concentration, tion, thus leading to an excessive con-
which would have a negative impact on centration. The Act against Restraints of
competition. Competition defines an enterprise as
Just like the rest of modern antitrust ‘dominating the market’ when there is
legislation, German law is not designed no competitor in the relevant market,
to hamper the internal growth of enter- when the enterprise is not being exposed
prises. This sort of concentration and to any significant competition, or when
market presence is usually based on the it has an ‘outstanding market position’
superior performance and capability of relative to its competitors.
the enterprise, and is not a punishable For the regular review of the level of
offence. If this has allowed an excessive enterprise concentration and the imple-
enterprise concentration to develop, mentation of merger control, an inde-
then only the law against abuse of mar- pendent monopolies commission has
ket position applies. The state replaces been established, consisting of five
the control function of competition expert members. Every two years, the
with government controls, which can commission submits a major report and
naturally only be a temporary measure it also compiles special reports on indi-
(supervision of abuse). vidual cases and problems.
It is better to prevent an excessive Enterprise concentration in a social
enterprise concentration from the start, market economy – and this equally
unless it is due to internal growth and applies to wealth concentration – is not
superior efficiency. The ‘merger con- merely of ‘economic’ importance in the
trol’ in modern restrictive trade practice narrower sense of the word. Both forms
acts, serves this purpose. That also of economic concentration can also give
applies to the German and the access to political influence. This can be
European law valid in Germany. The seen at the level of the municipality, for
→Act Against Restraints of Competition instance, where a large enterprise opens
requires that for control purposes, up. To prevent the sort of concentration
mergers of companies which fulfil cer- of political power typical of totalitarian
116 Concerted Action and Alliance for Employment
and other undemocratic forms of gov- today, was legally established. What is
ernment, the German constitution not the purpose of the establishment of
only insists on the classical division of such institutions, what are their chances
power between the legislature, the of success, and what kind of unfavour-
executive and the judiciary, but beyond able consequences are to be expected?
that there is also the decentralisation of Concerted actions and alliances are
power at the federal level, the states, the information and negotiation systems
municipalities and, on the other hand, through which government representa-
Europe, which has attracted significant tives and the representatives of organ-
areas of control by now (→Federal ised interest groups endeavour to
Republic, federal states, municipalities). answer contentious questions regarding
In a social market economy, the sort which way would be beneficial for the
of procedures for the decentralisation economy as a whole.
of political power which are also effec- The Concerted Action which was
tive in other federal democracies are created in 1967 was supposed to deter-
usefully supported by the prevention of mine reference levels for economically
an excessive concentration of power in justifiable wage increases and in this
the economic sense, which might be way keep inflation and →unemployment
converted into the sort of political down. The resolutions were only
influence which is not legitimate in a equivalent to recommendations and
democracy. thus not binding for the participant rep-
resentatives of the employers’ associa-
REFERENCES: tions and trade unions.
SCHMIDT, I. (2004), Wettbewerbspolitik und The purpose of the Concerted
Kartellrecht, Eine Einführung, 8th edition, Action in the Health Service is to slow
Stuttgart, New York, Chapter 6, Section V.
down the steep rise in expenditure of the
Kurt Stockmann compulsory →health insurance and thus to
prevent contribution increases (rising
wage additive costs). Members from all
Concerted Action and Alliance for sectors of the health service are expected
Employment (Konzertierte Aktion/ to commit themselves to the economical
Bündnis für Arbeit) use of funds.
The Alliance for Employment,
The red-green (Social Democratic Education and Competitive Ability,
Party-Green Party) federal government which was started in 1998, is particular-
officially declared alliances with interest ly focused on effective measures against
groups a core component of their con- high unemployment through agree-
sensual economic policy. A ‘Concerted ments between trade unions, employers
Action’, organised by the state, with and the federal government. Political
representatives from government, the decisions were to be taken in agreement
trade unions and the employers’ associ- with the trade unions and employers’
ations already existed from 1967 to associations (corporatism).
1977. In 1977, the Concerted Action in In fact, the success of institutions of
the Health Service, which still exists this kind was short-lived. An important
Concerted Action and Alliance for Employment 117
role in this is played by moderate wage that have been made in their organisa-
demands of the trade unions. After tions. If individual groups violate
1967, these were necessary due to shared resolutions they may benefit as
weakening economic stability (→busi- long as most of the other associations
ness cycle policy) and, in 2000, they were do not follow suit: in this way, one
caused by the high levels of long-term small trade union which decides to go it
unemployment, particularly among alone and to disregard tariff guidelines
poorly skilled workers (minimum wage causes its members to be financially
unemployment) for which wage poli- better off, because unfavourable conse-
cies were partly to blame. quences in the shape of rising inflation
In the Concerted Action in the rates (falling real wages) do not occur.
Health Service, after expenditure had But once the dam of moderate wage
gone up excessively, cost-curbing demands has been broken, other trade
appeals initially bore fruit. But there- unions will do the same. There are no
after, the expenditure dynamics sanctions for offences.
returned in full force. Concerted actions and alliances
The reasons why concerted actions cause false incentives: those who violate
and alliances of all kinds fail are obvi- resolutions benefit; those who stick to
ous. At first, all those involved are keen them are worse off. The durability of
to show their goodwill and to work for alliances is therefore questionable.
the common goals. Initially it is even Also, constitutional doubts exist
possible to garner the sympathy of the against the Alliance for Employment,
members of the represented bodies and although it is praised as an instrument
to persuade them to relinquish their of consensual economic policy. The
claims. Threats of legal enforcement federal government ought not to share
action (as in the case of the Concerted the political power with which it has
Action in the Health Service) from gov- temporarily been entrusted, with inter-
ernment bodies can also have a disci- est groups which have no democratic
plining effect. All corporations are unit- legitimacy. Furthermore, it is question-
ed at all times in their demands for able that only a few privileged individu-
more government funding. In order to als are invited to consensus discussions
be able to present alliances as success when large sectors of the population,
stories, governments often agree to including some 25 million pensioners
such requests (e.g. the employment and unemployed, are excluded. There
programme for unemployed adoles- is a danger that those sitting around the
cents). negotiating table come to an agreement
However, the consensus between which is to the detriment of the groups
the participating associations usually of the population that are not repre-
starts to crumble early on: dissatisfac- sented.
tion grows; members rebel; association A further shortcoming is the fact
leaders and trade union bosses are con- that all alliance participants are con-
cerned about their re-election; and cerned about their re-election, which
those sitting around the alliance table means that they only consider the
have no way of enforcing the promises immediate future. Successes need to be
118 Conflicting aims in economic policy
achieved quickly, while lasting, long- Wirtschaftspolitik, in: Volkswirtschaftliche

term advantages are not considered. Korrespondenz der Adolf-Weber-Stiftung, 39, 2.
Also, the sorts of resolutions that the
Walter Hamm
quest for consensus will yield cannot be
foreseen. The result is a high degree of
discouraging uncertainty for investors.
This is not the way to steer a clear and Conflicting aims in economic
reliable political course. Finally, parlia- policy
ment becomes disempowered as it is
now expected to take decisions that Economic policy aims can interrelate in
have been pre-determined by alliances. different ways. It follows that two aims
The Concerted Action in the which are pursued at the same time can
Health Service did not fulfil it expecta- be mutually inclusive and in tune with
tions. It was not possible to balance the each other. In that case, the aims are in
conflicting interests of those involved harmony. In the pursuit of the one, the
through negotiations. More and more other aim is promoted at the same time.
government spending cuts have been But, in economic policy, different aims
the result. are frequently in conflict. In such a
The Alliance for Employment died case, the one aim can be achieved only
a quiet death despite the continued rise if the other one is either sacrificed or
in unemployment. Something which achieved only to a limited extent.
had been commended as a milestone of Conflicting aims can almost be seen
red-green policy has now proved to be as the essence of any economic process.
a failure. This makes it even more Since we have only a limited amount of
important to combat the causes of mass goods, every individual continually has
unemployment with suitable measures, to decide which goods he/she can do
including a moderate wage policy, without in order to be able to enjoy the
opening up blanket collective agree- benefits of other goods. People who are
ments (allowing individual agreements economically active will try to take
on wages and working hours), social these decisions rationally, and in this
reforms and the removal of the numer- way will solve conflicting aims on a
ous legal regulations and superfluous continual basis. In a →market economy, it
job market layering. is largely up to individuals, households
and →enterprises to make economic
REFERENCES: decisions themselves in order to solve
ENGELHARD, P./FEHL, GEUE, H. these conflicting aims. This is the best
(1998), Konzertierte Aktionen, Runde way of taking account of personal
Tische, Aktionsbündnisse: Macht- desires and preferences.
beteiligung und Machtkontrolle organisiert- In a market economy, however,
er Interessen durch korporatistische
some decisions which concern the
Politikbeteiligung?, in: Cassel, D. (ed), 50
community have to be made on behalf
Jahre Soziale Marktwirtschaft, Stuttgart, pp.
741-768; KÜLP, B. et al (1984), Sektorale of society as a whole. Whether, for
Wirtschaftspolitik, Berlin et al, pp. 118-130; instance, a motorway or an airport
HAMM, W. (2000), Fallstricke konsensualer should be built, or whether the money
supply should be increased and by how nature finally understood that this atti-
much, must be decided by the various tude was not very helpful. Nowadays,
responsible administrative bodies. we concede that all suppliers and con-
However, because in that case the deci- sumers in the different markets are
sions are not primarily personal ones basically following their own interests,
but concern the community, the num- because we have learnt that the markets
ber of potentially conflicting aims is coordinate these different interests
greater. quite successfully.
There are essentially three reasons Should an economic policy-maker
for this. The first is that there are a great be allowed to act in his/her own interest
variety of different individuals and if he/she is honest about it? If the answer
groups of people, all of whom have very is yes, institutions are necessary which
different tastes and expectations in have a similar effect as the markets on
terms of economic policy. Thus people coordinating the interests of the eco-
who enjoy travelling or who have to nomic policy-makers with those of the
travel for business reasons want to have electorate. And there are such institu-
an airport close by which is well tions, the most important being the
appointed and has all the amenities. democratic system, the constitutional
Those, however, who live in direct state and the freedom of the media.
proximity of the airport without doing These taken together ensure that politi-
so much travelling are likely to be cians who continue to solve conflicting
opposed to such a development. By aims to their own benefit and against the
weighing up the interests of different interests of the population, will not
groups of people against each other, remain in office for long. This forces
economic policy-makers solve conflict- them to include the interests of the elec-
ing aims. torate in the pursuit of their own goals.
A second reason why economic pol- A third source of conflicting aims in
icy decisions are so beset by conflicting economic policy is somewhat more dif-
aims is that politicians also have their ficult to understand and arises from the
own interests. All too often their per- fact that economic decisions are gener-
sonal interests will not be in harmony ally based on expectations of human
with the interests of their constituen- behaviour. The following is a classical
cies. Since it is the former who are tak- example: since inflation is generally
ing the decisions in the end, they are regarded as undesirable, one might
clearly in a more powerful position, expect that governments will always do
which means that they can, if they are their best to keep the inflation rate low.
so inclined, take decisions which are But that is not necessarily the case.
useful to them but detrimental to soci- The reason for this has to do with
ety as a whole. For a long time, eco- the fact that there is often a time delay
nomic policy-makers were simply told before the electorate wake up to the fact
that their decisions must be based on that inflation is going up. When this
the common good and not on their happens, workers might forego higher
own interests. But even those who were wage demands in order to make up for
not completely cynical about human the losses they are incurring as a result
120 Conservatism
of inflationary prices. For business, this In general, the conflicting aims at

means that their profits are going up the economic policy level are more
while their labour costs remain static complex and more problematical than
due to the unchanged wages. Thus they are at the level of individual eco-
labour is becoming more profitable for nomic acting. This is only one of many
business, which means that they can reasons why an →institutional order policy
take on more workers. The result of which takes the desires of the citizens
inflation is therefore a decrease in into account, leaves as many decisions
unemployment! as possible to the citizens themselves.
Precisely this is the essence of what The background for this is nothing less
is possibly the most famous example of than the principle of subsidiarity, which
conflicting aims in economic policy – plays a central role in the concept of the
the one between the fight against infla- →social market economy.
tion on the one hand and →unemploy-
ment on the other. For a long time it was REFERENCES:
widely thought that unemployment BENDER, D./BERG, H./CASSEL, D., et al

could be effectively lowered through a (1999), Vahlens Kompendium der Wirtschafts-
politik, 2, 7th edition, Munich; FREY,
little more inflation.
B./KIRCHGÄSSNER, G. (2001),
In actual fact, this cannot work for
Demokratische Wirtschaftspolitik, 3rd edition,
long because the workers will obviously Munich.
soon become aware of the higher infla-
tion rate and will demand higher wages. Thomas Apolte
Then, after only a brief recovery phase,
unemployment will return to its previ-
ous level, while company →profits go
down again. What remains is inflation. Conservatism
Sometimes a government is content if
unemployment just goes down for a Colloquially, conservatism (or conserv-
short time – perhaps until after the next ativism) is defined as the characteristi-
election. Or a government is hoping just cally human attitude of preserving (tra-
to be able to cope with a threatening ditionalism), which sometimes has the
recession. It is for reasons such as these consequence of people stubbornly
that governments may not take the fight holding on to things which have
against inflation as seriously as they become outdated (reactionary think-
should for the sake of the electorate. ing).
Today the central banks in many There is no clear connection
countries are independent of the gov- between this fact and the conservatism
ernment. This is supposed to ensure which is a specific branch of the intel-
that their executives, who are mainly lectual and political history that links
responsible for the fight against infla- →liberalism and →socialism.
tion, are not tempted to buy better The intellectual development of
employment figures with inflation, conservatism starts with the critique of
only to find that the improvement does the Enlightenment and Rationalism to the
not last. Social Conservatism (G. Schmoller and
Conservatism 121
the Society for Social Policy, 1872), the ronmental responsibility, a focus on
‘conservative revolution’ and the cri- public welfare and political morality
tique of the Frankfurt School right up and a ‘constitutional patriotism’ (D.
to today’s cultural and social criticism. Sternberger).
The political line goes back to the This leads on to the ‘spiritual’ claim
debate on the French Revolution, of modern conservatism and its guiding
moves on to the establishment of the force for the future in an era of individ-
first conservative parties (England, ualistic hedonism (a life focused on
1832) and Bismarck’s social legislation personal pleasure), the materialistic
(1883 and after), and leads on to nation- dedication to consumption and the
al conservatism in the Weimar Republic immoderateness and permissiveness of
and the Christian Democratic and the media. In almost every aspect of life
Conservative parties of the German today a frightening lack of direction can
Federal Republic (Christian Democrat- be observed, without churches, schools
ic Union – CDU and Christian Social or political parties being considered as
Union – CSU). sources of meaning because they are
In each phase of its intellectual and themselves searching for guidance and
political development, conservatism has understanding, and have no answers to
emphasised equality and the need to the burning questions of the day. A loss
look ahead. But equality was balanced of authority results, which has a nega-
by liberty, responsibility and authority, tive effect even on politics, parties and
while rationalism was balanced by the the state.
organising forces of reason; evolution The ‘political’ claim results, on the
and tradition were set against revolu- one hand, from the increasingly pro-
tion; values, ethics and morality against gressive conservative outlook: princi-
indifference and arbitrariness; nation ples of responsibility such as provision
and state against anarchy and chaos; for the future (e.g. in the health serv-
confidence in the future and experience ice), sustainability (in ecology), fairness
against →constructivism and →interven- (regarding social reforms and rates of
tionism. Above all, conservatism of every pay) and subsidiarity (e.g. in the federal
shade is connected with a realistic view allocation of authority from the munic-
of people, as opposed to extremist ipalities to the federal states, and coun-
anthropological utopias which arise tries to the European Union) combine
from an exaggerated belief of people in the conserving and the creative strength
themselves and their capabilities. of conservatism.
Modern conservatism as a middle- On the other hand, the global aspect
of-the-road position is therefore no of political and economic relationships
longer conceivable without a Christian today requires a reliable understanding
or humanist anthropology (Doctrine of of the complex conditions of existence
Man; →Thielecke) and as the basis for a by thinking interdependently (mutual
critical awareness of history, a personal dependence; →Eucken), as well as the
ethical commitment to duty and protection of ‘→competition as a mecha-
responsibility, a sense of family and nism of discovery’ without ‘arrogance of
community, a love of nature and envi- knowledge’ (Friedrich August von
122 Constructivism
→Hayek), as an engine of social and eco- bureaucratic system, national planning

nomic development in a global world. and the practice of coercion, in order to
Today, such a programme can only realise policy goals and the endorse-
be mastered by reaching beyond the ment of collective solutions.
borders of political parties. This renew- The critics of constructivism argue
al of democracy and the →social market against this organising principle saying
economy through the spirit of conser- that:
vatism is indispensable in view of the
great challenges of the future. • the human faculties of understanding
are finite, which closely limits
REFERENCES: attempts at social planning;
OTTMANN, H. (1995), Konservatismus,
in: Staatslexikon, 3, pp. 636-640; • important social institutions are not
KALTENBRUNNER, G.-K. (1974), Die
purposefully created but are the
Herausforderung der Konservativen. Absage an
result of unplanned human interac-
Illusionen, Freiburg i. Br.; SCHRENCK-
NOTZING, C v. (ed) (1996), Encyclopaedia
tion and resist further development
of conservatism, Graz, Stuttgart. through intentional planning; and
Klaus Weigelt • attempts to make comprehensive

social planning a reality not only failed
to achieve the goal they had propagat-
ed but also through increasing restric-
Constructivism tions on individual freedom, fre-
quently ended in dictatorship.
The problem: Possibilities and
limitations of political acting in Unlike the constructivist school of
modern societies thought, its critics prefer competition to
The term ‘constructivism’ emerged planning and decentralisation to cen-
from the capitalism–→socialism debate tralisation, and they defend voluntary
of the last two centuries. There, those coordination against central control.
defending a liberal position raised the Among the critics of constructivism
objection against the suggestions of are the early members of the Scottish
mostly socialist authors in support of an school of moral philosophy, starting
engineered society, that societies cannot with Adam Smith (1723–1790) and
be planned, either as a whole or in David Hume (1711–1776), but also the
important parts. newer liberal authors such as Friedrich
The leanings which have been August von →Hayek (1899–1992), the
called constructivist are characterised continental neo-liberals and the con-
by a great deal of confidence in govern- temporary Anglo-Saxon classical liber-
ment behaviour, as for example when als. What they all have in common is
supplying important goods and services that they place a great deal of confi-
or through the solution of complex dence in liberal forms of human co-
social problems. Important tools of the existence and in the spontaneous forces
‘state of welfare provision’ are the of an open society.
Constructivism 123
In fact, the debate around construc- of the communist social ideal. Mao Tse-
tivism is not an ideological question but Tung, Pol Pot and numerous other dic-
a basic problem of the economy and tators later followed this example in the
social sciences. Does human society sense that they justified the elimination
allow itself to be manipulated and con- of entire classes and strata of society
trolled just like the physical world? In with the argument of wanting to create
other words, can the modern, technical a new society (Courtois).
and scientific way of thinking be trans-
ferred to social problems with equal The newer constructivism
success? Can, for example, the ‘visible The newer constructivism goes back to
hand’ of the state steer the economic the aftermath of the First World War
process in such a way that fluctuations (1914–1918) and the consequences of
and crises, the terror of all free market the world economic crisis (1929–1938).
societies, will soon be a thing of the Both events were interpreted as proof
past? that the old liberal order, which had
been ubiquitous throughout the
The older constructivism Western world during the 19th century,
There is a marked disparity of opinion had failed.
on the development of economic doc- The liberal social philosophy was
trine. Adam Smith and his intellectual replaced by the social or welfare state
successors delineate the sphere where and the belief in an all-encompassing,
social engineering is permissible very non-socialist economic order. The idea
closely, despite attributing a number of was to transform the social order of the
important public tasks to the state as time democratically, and on the basis of
political player. Early socialists such as the criteria of social equality and social
Auguste Comte (1798–1857) and Henri justice. This meant, for example, that
de Saint-Simon (1760– 1825), however, education and training policies were to
postulated that all the members of a create equal chances for all, that differ-
social system must pursue a ‘common ent levels of income were to be evened
goal’, which consists of a ‘plan for social out by progressive taxation, that the
progress’. This is, however, not same medical care for all would be
designed by those concerned but by guaranteed through compulsory insur-
scholars credited with the ability to pre- ance schemes, and that the dependence
dict the future development of society of the individual on family support was
accurately (Fehlbaum). to be replaced by governmental securi-
Finally, Karl Marx (1818–1883) was ty and welfare systems.
of the opinion that the historical col-
lapse of capitalism must inevitably lead On the critique of constructivism
to a ‘realm of freedom’ and thus to a The critique of both varieties of con-
new society. The failure of this progno- structivism tends to be based on princi-
sis after the socialist revolution in ples of value. The more radical models
Russia (1917) had the consequence that have been dismissed as utopian. The
the founders of the Soviet Union newer critique of constructivism, how-
decided on the forced implementation ever, takes a different path. It makes use
124 Constructivism
of epistemological and specialised • Political attempts to achieve the total

scientific objections to demonstrate the restructuring of an existing social
limitations of political acting in a free order encounter the difficulty that, in
society. each case, the society in its current
The liberal critique of construc- state was shaped by a long series of
tivism is based on the maxim ‘Where preceding events. They have left their
there is a will there is a way’. Social goals mark in traditional rules, behaviours
which rest on an unrealistic concept of and attitudes, of which the subjects
human nature cannot but fail. Those are either not or only partly conscious
who consider social engineering as the or aware (Hayek). Where rules are
way forward for social relationships are ‘discovered’, they are definitely not
opposed by the critics of constructivism comparable to the inflexible laws of
who see social processes in the light of natural science. This is also made evi-
evolution. This means that the most dent by the fact that until today, in the
important institutions of human civili- social realm, no ‘social laws’ compa-
sation – such as language, law, arts, rable to the laws of nature exist. All
science, ethics, customs, the division of attempts to establish them have
labour or the markets – are not the failed. In other words, the social
result of purposeful human planning sciences are not (or not yet?) in pos-
but grow out of human interactions session of a well-tested body of
with no special intention or plan. empirical knowledge that allows
Adam Smith’s concept of the ‘invis- them to make the sort of progress
ible hand’ and/or the idea of self-con- which modern technical knowledge
trol or self-organisation of social insti- manifests almost daily.
tutions clarify this world view. The
institutions mentioned here can neither • The ‘economy’ and the ‘society’ are
be consciously designed nor can they be extremely complex phenomena that
successfully developed further by con- cannot just be understood from the
scious design. In those areas where – for point of view of control (or at least
instance in art, science or ethics – polit- not sufficiently). The attempt, first in
ical control along the lines of precon- the Soviet Union and in many other
ceived political ideals is attempted, countries thereafter, to replace the
intellectual stagnation and the birth of traditional way of coordinating indi-
social illusions are the consequence. vidualised economic planning with
centrally managed markets, repre-
The evolutionary versus the static view sents a crucial large-scale experiment.
of society The expectation was that the out-
The older conceptualisations of a ‘new come would be a successfully func-
society’ are usually linked with the tioning economy, far superior to the
promise of a permanently valid and alleged ‘chaos of the markets’ in just
eternally fair social order. This gives about every respect. This experiment
them a static quality. However, four failed though, not least because of the
arguments can be derived from the evo- impossibility of even trying to cen-
lutionary view of social processes. trally coordinate the highly complex
Constructivism 125
network of input and output between new possibilities while correcting

enterprises in a satisfactory manner. mistakes along the way), which has
Constant interruptions to the pro- been an important mechanism driv-
duction process ‘due to lack of mate- ing human progress. The total col-
rials’ were a daily occurrence. It is lapse of 1989–1991, which put an end
therefore not surprising that where to these policies in the socialist coun-
central economic planning has been tries, is hardly surprising.
forced to survive to the present day
(Cuba, North Korea), the standard of • The hope that planning leads to suc-
living of large parts of the population cess and that social engineers can
has plummeted to below minimum create a better world is usually linked
subsistence levels. with the concept that there is an
enlightened elite, an avant-garde of
• Large-scale social experiments (such the proletariat, an infallible party or a
as the design of a new society) are leader loved by the people, able to
faced with the problem that control- point out the right way into the
ling the successes leading to the new future. None of the expectations that
society becomes a political issue. the older social planners cherished
Compared with more gradual and was as thoroughly disproved by expe-
limited reforms, which make it possi- rience as these. The more recent his-
ble for open societies to learn from tory of the Eastern and Southern dic-
mistakes (Popper), the plan to estab- tatorships shows unmistakably that
lish a completely new society is a the governing autocrats and their fol-
process which makes it uncommonly lowers generally make personal gain
difficult and even dangerous to point the first purpose of their rule. The
out mistakes or voice criticism. All promise of a higher standard of living
human institutions have shortcom- for the broad population is only rele-
ings. If these manifest themselves in vant if the security of their respective
the form of planning failure or the positions of power is at stake.
typical ‘economy of scarcity’, then one
must ask what the reasons are. Since Interventionism and constructivism
the revolutionary restructuring of In view of the fact that nearly all social-
existing social orders can be politically ist societies have collapsed in the past
justified only with the argument that two decades, the idea of wanting to
it will lead to a better world, system create a completely new society is today
failures have to be blamed on ‘ene- more or less extinct.
mies’ – be they class enemies, It has been widely accepted that one
deviants, dissidents or foreign agents. is dealing with a utopian concept here
If anyone makes the allegation that or – in terms of the present topic – that
the new system has inherent mechan- the necessary knowledge and means for
ical defects, he/she is automatically the implementation of a socialist cen-
suspected of being an enemy of the trally planned economy and society do
state. This eliminates the process of not exist. This is why it is relevant to
trial and error (the method of trying ask the question whether the same
126 Consumer policy
applies to the models of the welfare that, unlike liberal solutions, they either
state that have succeeded socialism. make it much harder or completely
They are characterised by the fact that impossible to try out alternatives, to
regulations are put in place in key areas experiment with new solutions and to
of human life which the individual citi- learn from experience. The only way to
zen can evade only with great difficulty, implement changes is through the slow
if at all. The national monopolies which political channels, with the conse-
have been created for this purpose to quence that the compromises that have
provide for retirement, health care, been achieved through the political
education or access to the job market process are what matters, rather than
are not only a danger to individual lib- the issue at stake. The critics of the con-
erty but, in terms of a critique of constructivist doctrine therefore want the
structivism, must be seen as solutions state to extricate itself from many of the
that are not viable at the end of the day numerous commitments that it has
and that are not able to cope with the taken on in the course of the past eight
tasks they have been assigned. One decades.
example is the constructivist-collec-
tivist solution in terms of which →old- REFERENCES:
age pensions are organised in most wel- COURTOIS, S. (1998), Das Schwarzbuch des
fare states. This is one way of proving Kommunismus, Munich, Zurich; FEHL-
BAUM, R.-P. (1970), Saint-Simon and the
that, without fail, ‘century laws’ have to
Saint-Simonisten. Vom Laisser-Faire zur
be revised at short intervals.
Wirtschaftsplanung, Basel, Tübingen; HAYEK,
A plausible explanation why the so- F. A. v. (1970), Die Irrtümer des Konstruk-
called reforms have never succeeded is tivismus und die Grundlagen legitimer
the large number of unknown or gesellschaftlicher Gebilde, Munich, Salzburg; —
unforeseeable variables, which quickly (1971), Die Verfassung der Freiheit, Tübingen;
render every previous forecast obsolete. POPPER, K. R. (1992), Die offene Gesellschaft
The situation is similar for the health und ihre Feinde, 2 vols, 7th edition, Tübingen;
service, or the government unemploy- WATRIN, C (1979), Vom Wirtschaftsdenken
ment agencies, or the attempts to large- der Klassiker zu den neoliberalen
ly eliminate crises and fluctuations of Ordnungsvorstellungen, in: Linder, W./
the economy by following Keynes’s Heibling, H./Bütler, H., Liberalismus – nach
wie vor, Buchverlag der Neuen Zürcher
prescriptions. Even the public educa-
Zeitung, pp. 81-102; YERGIN, D/STANIS-
tion system – which is much more
LAW, J. (1999), Staat oder Markt. Die
transparent and which despite certain Schlüsselfrage unseres Jahrhunderts, Frankfurt/M.
moves towards liberalisation remains
subject to government dictates – does Christian Watrin
not come close to achieving the results
which elsewhere, in less regulated edu-
cation systems more exposed to compe-
tition, are the norm. Consumer policy
In terms of the critique of construc-
tivism, however, the main defect of Competition connects production and
constructivist solutions lies in the fact service with consumer interests. Three
Consumer policy 127
key arguments have long been held ply serve as an excuse for the govern-
against the theory of the sovereignty of ment to engage in interventions that are
the consumer. not in synch with the market. In the case
As well as in the past, these argu- of services pertaining to infrastructure,
ments are nowadays also frequently we need to examine which task the gov-
used to justify government interven- ernment should actually perform. It
tions today, above all, by the European may entail securing the supply, the
Commission: funding or, as the example of →education
funding demonstrates most clearly, the
• One has to be thoroughly informed about distribution.
the products on offer. Thanks to the The legal aspect of →supply and
internet, this condition is fulfilled. demand is the contract. The government
has the duty to guarantee the prerequi-
• Marketing, and in particular advertising, site ‘freedom of contract’. This also
manipulates the consumer. This thesis means that the consumer must be
has been disproved by social psychol- assured through a warranty that the
ogy. The theory of in-built obsoles- acquired products actually have the
cence is equally disprovable. promised characteristics. Sales contracts
have to be exclusively based on free dec-
• Markets only partly take consumer interests larations of intention. This applies to
into account and are not suited to the pro- hawkers just as much as for telesales.
vision of public utilities. The opening of Through product requirements, the
government-controlled markets like government has to protect the public
telecommunications to →competition against health risks of which they can-
shows that markets are better able to not be aware. This applies to materials
satisfy consumer interests than gov- in food which are harmful to health and
ernment control. to unsafe technical gadgets. This cannot
apply if health hazards are obvious, as
Nevertheless, governmental compe- they are for smoking. Product prohibi-
tition policies are not enough for con- tions or large compensation claims for
sumer interests to have the desired general risks that are commonsense are
effect. There are goods that we require opposed to consumer sovereignty. To
but that are not marketable. Here, the give consumers the chance to choose,
exclusion principle does not apply or they must be informed about the ingre-
only to a limited extent. The exclusion dients of foodstuffs and luxuries, the
principle means that when we use a material composition of goods, as well
commodity alone, we can exclude oth- as the resource consumption of techni-
ers from its use. It applies to cars and cal aggregates.
furniture but not to, for example, inter- Product information should
nal and external defence and flood pro- become a compulsory requirement for
tection. These goods are called ‘infra- suppliers. General consumer informa-
structure’. This term is more precise tion, quality information through com-
than the fuzzy term of ‘provision for parative goods testing and consumer
one’s daily existence’, which might sim- counselling, however, are useful and
128 Council of Experts
valuable services for the consumer – charge of economic policy, but also for
services that can be, and are, requested the general public, to form an opinion.
and offered in the markets. There is no The council produces annual and
reason for government intervention. special reports. The annual reports
If, despite a functional competitive examine different ways of fulfilling eco-
policy and sufficient consumer protec- nomic goals within the framework of a
tion laws, consumers are still unhappy market economy.
with their market position, they are From the point of view of the gen-
entitled to form an organisation. The eral economy, these goals are →price
consumer protection movement in the level stability, a high level of →employment
United States and the reactions of con- and a →balance of payments equilibrium
sumers in Germany to information combined with appropriate →growth.
about enterprises’ environmentally Besides that, the Council of Experts is
damaging or exploitative practices show supposed to identify erroneous trends
that consumers can be a force to be and to indicate ways of preventing or
reckoned with. eliminating them without, however,
Apart from the legal entitlement to recommending specific measures (rec-
information and protection which has ommendation prohibition).
already been mentioned, the most The council is exclusively bound by
effective consumer policy is an under- its contractual appointment. In its activ-
standing of economics. Consumers ities, it is independent of government
who understand how a market econo- directives. In this respect, it differs sig-
my works, automatically also know nificantly from advisory committees in
how they can exert pressure and how other countries (the Council of
they can enforce consumer interests. Economic Advisors in the United
States does its government’s ground-
REFERENCES: work). If the Council of Experts identi-
KUHLMANN, E. (1990), Verbraucherpolitik, fies erroneous trends in individual areas
Munich; HANSEN, U./ STAUSS, or if it is appointed by the federal gov-
B./RIEMER, M. (eds) (1982), Marketing und
ernment to do so, it may or it may be
Verbraucherpolitik, Stuttgart.
required to provide an additional report
Wolfgang Reeder
(special report).
During the early years of the coun-
cil’s existence, issues related to eco-
nomic stability were the priority. The
Council of Experts influence of →Keynesianism put special
emphasis on the question of how
The Council of Experts for the assess- macroeconomic goals could best be
ment of the economy was created by achieved. But when it became clear that
legislation in 1963. Its task is to draw up this was not the right political approach
regular reports on the state of the econ- for the solution of urgent macroeco-
omy and on developments in Germany nomic problems such as high →unem-
for the foreseeable future. This is meant ployment, questions of →institutional
to make it easier for the authorities in order policy became key. Thus in its 1996
annual report, the Council of Experts REFERENCES:
presented a comprehensive analysis, HOLZHEU, F. (1989), Grundsatzprobleme

pointing out weaknesses in crucial areas wirtschaftspolitischer Beratung am Beispiel 25
Jahre Sachverständigenrat zur Begutachtung der
of the social security system (the public
gesamtwirtschaftlichen Entwicklung, Wirtschafts-
→health insurance, →pension and unem-
wissenschaftliches Studium (WiSt), 5, pp. 230-
ployment insurance) and indicating possi- 237; (WiSt), SCHLECHT, O./ SUNTUM,
ble approaches to reform. This was a U. van (eds) (1995), 30 Jahre Sachverständigen-
stimulus for the political debate in these rat zur Begutachtung der gesamtwirtschaftlichen
areas. In its 2000 annual report, the cur- Entwicklung, Krefeld; SCHNEIDER, H. K.
rent reforms in the sphere of old-age (1994), Der Sachverständigenrat zur
provision underwent a critical analysis, Begutachtung der gesamtwirtschaftlichen
while reform strategies were suggested Entwicklung 1982-1992, in: Hasse, R.
before the background of imminent H./Molsberger, J./Watrin, C (ed), Ordnung in
reforms in the health system. In its Freiheit, Stuttgart, Jena, New York, pp. 169-
2003 annual report, the Council of 181; Internet: http://www.sachverstaendigenrat.
org (current affairs, report, service, organisa-
Experts supported the transition from
tion, legal code).
the synthetic to the dual income tax sys-
tem and a lowering of the tax rate. Martin Wolburg
Demands for reforms of the labour
market, however, are the central theme
of the reports.
The Council of Experts consists of Currency system and exchange
five members (‘five wise men’), who rate regimes
are appointed for five years by the
Federal President after nomination by In theory, exchange rate regimes can be
the federal government. Every year, the divided into two extremes: systems
term of office of one of the council with completely flexible exchange rates
members runs out, but reappointments and systems with completely fixed
are permissible. In order to preserve the exchange rates.
impartiality of the council, its members Complete flexibility means that
may not be part of the government, a there is no direct intervention from the
trade association or a workers’ or central banks in the price formation
employers’ organisation. process on the foreign exchange mar-
Each time a vacancy has to be filled, kets through buying and selling curren-
however, the trade unions and the cies. Then the exchange rates can form
employers can make use of their infor- freely according to →supply and demand
mal right to suggest a candidate, usually (‘floating’).
to guarantee the acceptance of the Completely fixed exchange rates
annual report by the interest groups. If result if the central banks keep the
the council does not succeed in agree- exchange rates constant at a certain level
ing on a certain question, individual through potentially unlimited buying
members are entitled to express their and selling of currencies, or if the rates
differing opinions in the report (minor- have been irrevocably fixed by political
ity votes). authorities.
130 Currency system and exchange rate regimes
Between these two extremes, there world monetary system since the
are systems with more or less flexible Second World War – the Bretton Woods
exchange rates: managed floating, fixed system, conceived in 1944 before col-
exchange rates with range and exchange lapsing in 1973 – was handled as an
rates with or without range with graded exchange rate system with graded flexi-
flexibility. Managed floating means that bility. The same basically applied to the
central banks influence flexible European Monetary System which was
exchange rates through interventions at in force from 1979 until the introduc-
their current level. tion of the European Monetary Union
In the case of fixed exchange rates on 1 January 1999. Otherwise, a global
with range, a parity level between two system of managed floating has been in
currencies is fixed, but the exchange existence since 1973.
rate can fluctuate around parity within a Nevertheless, a number of different
certain range either upward or down countries link their currency to an
(e.g. around ±2.25%). If the exchange anchor currency or a currency basket
rate reaches either the upper or lower with a fixed exchange rate. The strictest
limit of the range, the central bank is link is the currency board, where the
forced to intervene, but alternatively it central bank of the linked country will
can intervene – intra-marginally – arrange the national money supply
before a limit has been reached. exclusively on the basis of the stock of
An exchange rate system with grad- its anchor currency.
ed flexibility has a fixed parity level – A country that has several curren-
with or without range, but occasionally, cies co-existing, officially or unofficial-
due to new foreign exchange market ly, as legal tender with exchange rates
conditions, this is adjusted to a new that are flexible has a competitive mon-
level (revaluation or devaluation). etary system. A special development is
Closely related to this is the crawl- the parallel currency system, where
ing peg, where a country increases or there is only one competing currency.
decreases the exchange rate in instal- The currency of a country is called
ments – usually with warning: e.g. fully convertible when it is not subject
around 1% per month, taking into to any capital movement restrictions,
account the inflation gap between the i.e. if the currency can be imported and
two countries. Block floating is a com- exported without any restrictions by
bination of fixed and flexible exchange residents and foreigners.
rates, where several countries adopt a
fixed exchange rate while jointly prac- REFERENCES:
tising exchange rate flexibility in rela- BORCHERT, M. (1997), Außen-

tion to third currencies (‘currency wirtschaftslehre, 5th edition, Wiesbaden;
SCHÄFER, W. (1981), Währungen und
snake’). The flexibility of the block
Wechselkurse, Würzburg; MAENNIG, W./
exchange rate can also be limited to a
WILFLING, B. (1998), Außenwirtschaft.
certain range (‘snake in the tunnel’). Theorie und Politik, Munich.
While the gold standard (used most-
ly before the First World War) was real- Wolf Schäfer
ly a system of fixed exchange rates, the
Demographic development there are about 82 million people in

Germany today, there might be fewer
Facts than 80 million in about 2025 and only
The 20th century will be recorded as 70 to 75 million by 2050, depending on
the century with the largest population the estimated number of immigrants
increase in the history of mankind. If (→international migrations).
the world population around 1900
totalled just over 1.5 billion people, by Causes
1950 it had grown to 2.5 billion. By the Only two independent variables have a
end of the century, our planet was pop- direct impact on population develop-
ulated by more than 6 billion people. ment: birth rate (fertility) and number
What used to take several thousand of deaths (mortality). For the national
years in terms of the multiplication of population sizes the (international)
the population, took just a few decades migration balance has to be added as a
in the 20th century. third, unknown quantity.
Growing world population ... Many births and decreasing mortality outside
The population increase will continue Europe ...
in this century, too, but at a slower rate. The dynamic growth of the world pop-
According to United Nations (UN) ulation in the 20th century can basical-
estimates, there could be in excess of 8 ly be attributed to an utterly simple
billion people in 2030, and this could equation: the number of births far
have increased to approximately 9 bil- exceeded the number of deaths. The
lion by 2050. This figure is a far cry question that remains is: what led to
from the prophesies of doom which this gap between fertility and mortality?
had predicted a population explosion. Here, the first thing to consider is
But it nevertheless represents an enor- demographic transformation. Thus the
mous challenge, because 3 billion more mortality decrease is mainly seen as a
people will demand more water, food, consequence of improved medical care,
energy and raw materials. And yet, hygiene and economic living conditions
decreasing natural resources and in Africa, Asia and Latin America, fol-
increasing ecological problems are less lowed only much later by a slowing
the result of the global population birth rate. This caused the relatively
growth than the consequence of indi- great differences between births and
vidual production and consumer deaths.
behaviour. The high birth rates of the recent
past in Africa, Asia and Latin America
... shrinking population in Europe have led to an age distribution with a
In Germany and the other Organisation relatively large proportion of young
for Economic Cooperation and women in their reproductive years or
Development countries in Europe and growing into them. Even if from today
North America, population growth has onwards, hypothetically and for what-
ceased to be an issue. On the contrary, a ever reasons, fertility were to shrink sig-
population decrease is imminent. If nificantly (e.g. to two children per fam-
132 Demographic development
ily), the populations of these regions average giving birth to 133 children –
would still keep on growing for a very one half of the number one generation
long time. These dynamics inherent in earlier.
population trends will continue to gen- The net reproduction rate (NRR)
erate a strongly positive growth rate of measures the number of girls born
the population for several decades to alive, to whom 100 women of the same
come. generation have given birth. A NRR of
100 means that the status of a popula-
... strong decline of the birth-rate and growing tion remains constant, because a gener-
life expectancy in Europe ation of women has just been ‘replaced’
Since the mid-1960s, the birth rate in by the daughters to whom they gave
the industrialised states has been birth. A NRR <100 (>100) means that
declining. Germany is no exception. a population shrinks (rises). A NRR of
Since the peak of the baby boom in the 70, for example, means that within one
middle of the 1960s, fertility has generation, a population has shrunk by
declined markedly. about 30%.
In 1965, in the course of their lives, For Germany, in 1960, the NRR
100 women living in Germany gave was 110; in 1975 it was 68; in 1990 70;
birth to an average of about 250 chil- in 1998 it was about 66; and in 2005 it
dren. Within a decade (i.e. by 1975) the was 64, which means that within the
birth rate went down to fewer than 150 next generation the German population
children. Since that time, this number will shrink by approximately one third.
has continued to decrease – rather dra- The reasons for the declining birth
matically after the German →reunifica- rate are not found in any singular key
tion because, particularly in the new event. This means that the thesis of the
German states, the desire to have chil- ‘pill kink’ is untenable. While contra-
dren went into a notable decline. In ception does lead to a decrease in
1998 in Germany, 100 women were on unwanted births, its availability repre-
Average life expectancy in Germany, 1871–2005

sents only an option and not the cause Europe is generating enormous prob-
of the declining birth rate. It is not the lems which result from the changed age
availability of contraception which is configuration of the population.
crucial, but the intention of using it. Children are decreasing in number,
More relevant for the explanation of while the number of elderly and old
a declining birth rate might be the Germans, and other Europeans, is ris-
change of function of the family, the ing. The result is an ageing German and
new way women see their role (eman- European population.
cipation) or the individualisation of If today still more than half of the
society. German population are less than 40
Today, the desire to have children is years old, by 2050 this median age will
more strongly linked to the individual have risen by about 10 years. By the
interests of both partners. The fact that middle of the century, half of all people
children are ‘expensive’, reinforces the living in Germany will be older than 50.
trend towards small and micro-families. The ageing of a society can be clear-
And here the problem is not only direct ly illustrated with the so-called age quo-
expenditure, but also indirect (time) tient. The age quotient (AQ) gives the
expenditure, which means that children proportion of pensioners at the age of
stand in the way of professional (career) 65 or older to the employable popula-
opportunities being realised. tion between 15 and 64.
In Germany, the 20th century gave An AQ of 0.5 means that there are
rise to a marked increase in life two employable people per pensioner,
expectancy (see figure). In 1871, at birth, or twice as many working people as
life expectancy was 36 years for boys pensioners. A rising AQ shows that for
and 38 years for girls. By 1910, it had each pensioner, there are fewer and
climbed to 45 years for boys and 48 fewer employable people.
years for girls. Someone who was born With an AQ of one, there are as
in 1998 can expect to reach the age of 74 many pensioners as employed people.
for men or over 80 for women, and in For Germany the AQ has the following
2005 life expectancy was 76.7 for boys values: 1991: 0.22; 2000: 0.23; 2020:
and 82 for girls. Mortality, particularly 0.32; 2040: 0.48. This means that
during the first year of life and between instead of the four working Germans
the ages of 60 and 80, has decreased per retired citizen, in 40 years there will
considerably. According to present-day only be two.
medical knowledge, a further mortality
decrease this century will proceed at a Macroeconomic consequences of the
much slower pace. The formula for demographic ageing of Europe
eternal life has still not been found, Hardly any sphere of the modern serv-
which means that even in the 20th cen- ice society will be spared the conse-
tury the maximum life span could only quences of ageing. In the first place,
be extended slightly. there will be a change in the supply of
labour. A dwindling number of young
Consequences workers will be available to replace the
The contraction of the population in senior workers preparing to leave the
134 Demographic development
production process. Today’s problem of pension pay-outs for those who are no
→unemployment is partly palliated by longer working. In simplified form, the
demographic processes. It cannot be following pension formula applies: the
excluded that even a lack of younger, sum of the contributions (= number of
efficient workers might arise, which payments x by the average rate of con-
could then be remedied in different tribution x by the average income)
ways, for example: must correspond to the sum of the dis-
bursements (= number of pensioners x
• making use of resources which are by the average pension category, x by
lying dormant today (above all the average last earned income).
women and individuals in early Pay-as-you-go based systems are
retirement); rather susceptible to changes in the age
structure of a population. The German
• making retirement age flexible, also population is living to an older age,
upwards (e.g. later retirement in line which in terms of the pension formula
with a higher life expectancy which means that while the number of con-
continues to rise); tributors is declining, there is also a
growing number of people entitled to a
• higher levels of immigration (particu- pension. Therefore, either the average
larly of younger qualified workers); rates of contribution must be increased
and or the average pension disbursements
will have to be reduced (a third solution
• accelerated (labour-saving) progress would be the uneven distribution of
of productivity. future productivity advances).
It seems to be becoming increasing-
In short, particularly the demo- ly unavoidable to supplement the long-
graphic development will make it nec- standing pension insurance scheme
essary for more women and more peo- with an additional second column
ple over retiring age to be included as a (legal, national, mandatory) based on
resource of labour and know-how. individual provisions (e.g. private sav-
ings).
How safe are retirement pensions? Immigration represents another
In the medium term the ageing potential solution whose effect, howev-
(German) society will be confronted er, tends to be overrated. Depending on
with problems regarding →pensions. In the forecast, annual immigration ratios
Germany, as in almost all other of several hundreds of thousands of
European countries, pension systems people would be necessary in order to
are largely based on a national system of be able to keep the AQ at today’s level.
statutory insurance contributions, Furthermore, the immigration effects
organised on a pay-as-you-go basis are only temporary, since the immi-
(current disbursement). grants too will sooner or later have
In a distribution system, the regular claims against the pension system
contributions made by the active work- which they have helped to finance
force to a retirement fund cover the (→old age pensions).
Deregulation 135
REFERENCES: result is economic sclerosis and ineffi-

BUNDESINSTITUT FÜR BEVÖLK- ciencies, which are detrimental to pros-
ERUNGSFORSCHUNG (BiB) beim sta- perity, growth and unemployment.
tistischen Bundesamt in Wiesbaden,
Until the 1990s, half of the German
Materialien zur Bevölkerungswissenschaft, (cur-
economy, particularly in the service
rent issue); STATISTISCHES BUNDE-
SAMT, Statistisches Jahrbuch für Deutschland
industries, was more or less strictly reg-
(annually), Wiesbaden; WORLD BANK, ulated. This also applies to the job mar-
Weltentwicklungsbericht, (annually). ket even today (collective blanket wage
agreements, excessive worker protec-
Thomas Straubhaar tion laws, far-reaching worker →co-
determination regulations in companies)
with correspondingly severe disrup-
tions and high levels of long-term
Deregulation unemployment as a consequence.
In recent years, however, regula-
Deregulation is about the politics of tions have been phased out, usually in
opening markets. It is instrumental in connection with the completion of the
the removal of regulations, which the European domestic market. The
state or, with its agreement, federations telecommunications, air transport and
and professional organisations have electric power industries are the most
introduced in favour of certain group- prominent examples.
ings of workers – for example, limita- Deregulation is not always about
tions on market entry and exit (→open doing away with existing regulations
markets), price and quantity regulations entirely; at times it is sufficient to soft-
and compelling contract designs. In en or modify them. But regulations
addition, there are specifically targeted which have become superfluous or
exemptions from the general trust pro- always were superfluous must be abol-
hibition and special privileges for ished. This also applies in cases where
→public enterprises. the purpose of a regulation clearly does
This sort of targeted interference not justify its cost to the economy as a
with the freedom of trade is only eco- whole, especially if allocation distor-
nomically justified in a case of market tions have been the result.
or competition failure. This can, among In macroeconomic terms, deregula-
other things, happen in the case of tion promises five lasting advantages:
external effects of production and in
consumption, in natural monopolies • As the popular saying goes, competi-
and in cases of information asymme- tion promotes business. A producer
tries (unequal status of information) who wants to make profits will have
between contracting parties. In these to try hard to boost the productivity
cases the situation would, without of business while keeping costs and
adjustment, get out of hand. prices low, as well as bringing attrac-
In reality, market anomalies of this tive goods and services to the market.
kind tend to be rare and a surplus of
regulations is more of a problem. The • More room for profitable economic
136 Deregulation
activity leads to higher productivity, The more stable the foundations on

and more productivity results in a which they are built, the more lasting
greater demand for labour. the positive effects of the policy of
deregulation will be. Obviously, there
• Flexible markets facilitate the adjust- will also be negative effects here and
ment process for both industry and there. Basically, there will be disadvan-
the workforce to the age of →globali- tages for those who were hitherto pro-
sation and the internet, and to the protected against →competition by special
found structural economic changes it regulations. But owing to the intensi-
brings. A brisk structural change pro- fied macroeconomic dynamics which a
motes growth and favours employ- comprehensive deregulation liberates,
ment. these disadvantages will mostly be tem-
porary.
• The positive employment effects are For maximum effectiveness, dereg-
reinforced by measures which ulation requires safeguards in three
increase the flexibility of the goods areas:
markets, if there is a liberalisation of
the labour market too. This means • A safeguard is needed in respect of
that the parties to a wage agreement the simplification and acceleration of
not only have to pay more attention legal and administrative authorisation
to the remuneration agreement itself, procedures which are relevant for
but also to the other conditions of investments and business start-ups.
employment. Wage levels need to be
in line with market conditions and • It should always be checked whether
they must also be sufficiently differ- an existing law, a legal requirement or
entiated in terms of regional differ- an administrative regulation should
ences and different levels of qualifica- either remain in force or be phased
tion. This creates an environment out. An over-abundance of regula-
where obstacles to employment for tions is extremely counterproductive
job-seekers are reduced and where it for an economy and tempts people to
becomes less rewarding for them to break the law.
resort to the →shadow economy.
• Deregulation must be based on the
• It means that the internationally consistent application of the competi-
mobile factors of production can tion protection laws in order to pre-
count on more attractive returns, vent both cartel agreements among
with the result that the entire country those who were previously regulated,
becomes more desirable as a location and the abuse of power by the suppli-
for both investment and industry. er to the detriment of the consumer.
Capital equipment and skilled labour This is why, for example, in the case
flow into the country instead of leav- of the telecommunications deregula-
ing it, boosting its economy as a tion it became necessary to regulate
whole and expanding its productive the former monopoly in an asymmet-
capacity. rical fashion in its various different
areas of application (tariffs for fixed- nition primarily refers to the aspect of
line telephone calls; becoming a satisfaction of needs.
Telekom subscriber), in order first to The standard of living, i.e. the
kick-start and then step up competi- opportunities people have for satisfying
tion through additional service their needs, are very much smaller in
providers. These regulations can be developing countries than in industri-
phased out as soon as there is enough alised countries. The per capita income
competition in the end-consumer level is usually selected as an indicator
markets, something which should be of the standard of living.
determined by an impartial authority Many people in developing coun-
such as the →Federal Cartel Office in tries live in abject poverty and are not
Germany. able, with their available per capita
income, to satisfy their basic needs.
Constitutive regulations are not part Basic needs are things like sufficient
of deregulation. These apply to every- nutrition, shelter and clothing, as well
one and safeguard – particularly in the as access to education and public health
context of civil law – the functionality services, drinking water and public
of the →social market economy. transport.
The most important development
REFERENCES: policy goal is to increase the
DEREGULIERUNGSKOMMISSION standard of living in developing coun-
(1991), Marktöffnung und Wettbewerb: Berichte tries, particularly for the poor popula-
1990 und 1991, Stuttgart; BOSS, A./LAAS- tion groups. In addition, development
ER, C.-F./ SCHATZ, K.-W. et al. (1996),
policy measures have economic, politi-
Deregulierung in Deutschland: Eine empirische
cal and social aims.
Analyse, Tübingen; DONGES, J. B. (1997),
Die Wirtschaftspolitik im Spannungsfeld
From an economic perspective,
von Regulierung und Deregulierung, in: development policies are focused on
Ordo-Jahrbuch für die Ordnung von Wirtschaft three targets: the most basic prerequi-
und Gesellschaft, Vol. 48, pp. 201-217 site for a better standard of living is an
improved supply of goods thanks to
Juergen B. Donges economic →growth (growth target).
Second, improved goods distribution in
order to ensure the maximum satisfac-
Development aid, development tion of needs for the population. This
policy requires the reduction of abject poverty
and a diminished income concentration
The term ‘development policy’ covers in nearly all developing countries (dis-
all measures that are implemented to tribution target). Third, a permanently
improve the level of development of improved standard of living presuppos-
underdeveloped nations. If the level of es that the environmental effects of
development of a country is regarded as human activities are taken into account.
being intolerably far behind that of the This means that the development poli-
industrialised nations, it is generally cy agenda must include an →environ-
called a developing country. This defi- mental target.
138 Development aid, development policy
For the implementation of the tar- takes the form of soft loans. Personal
gets listed here, a stable political, social cooperation offers →vocational training
and economic framework is indispensa- and further education to produce highly
ble. In many developing countries, the skilled staff in leading positions who are
absence of such a framework is the expected to bring about a higher educa-
greatest obstacle to development. Apart tional standard in developing countries.
from the establishment of stable basic Technical cooperation offers tech-
conditions, the main focal points of nologies as well as organisational and
economic development policy are the economic know-how and skills to
promotion of real capital formation, developing countries. All three forms of
better education and health conditions cooperation complement one another.
of the entire population, the develop- Often, development cooperation
ment of the infrastructure, as well as the also makes a difference between pro-
establishment of important institutions gramme and project aid. While project
(among other things, financial institu- aid is directly aimed at certain activities
tions and social security systems). (e.g. the construction of roads), pro-
While development policy refers to gramme aid is intended for the support
the full range of measures which fur- of specific areas and macroeconomic
ther the development of a country, the reform programmes. How the means
term development assistance implies are used is up to the target country in
measures that a foreign country takes to this case, but their disbursement is nor-
support the development process of mally tied to certain conditions (usually
underdeveloped countries and which the implementation of reforms) (condi-
would not be thinkable in their specific tionality).
form without the concept of aid (e.g. The best-known form of pro-
interest-free credit). gramme assistance comes in the form
Nowadays, development aid tends of the structural adjustment pro-
to be called development cooperation, grammes of the IMF and the World
and it is divided in various ways. Bank. Here, a country, in agreement
Depending on the nature and origin of with the respective donor institution,
the aid, a distinction is made between decides on a free market reform pro-
bilateral and multilateral cooperation. gramme whose implementation is sup-
In bilateral cooperation, aid comes from ported by structural adjustment loans.
an individual donor country. In multi-
lateral cooperation, it comes from a REFERENCES:
group of donor countries or →interna- BMZ (2000), Medienhandbuch Entwicklungs-

tional organisations (the World Bank, politik; HEMMER, H.-R. (1988),
Wirtschaftsprobleme der Entwicklungsländer;
International Monetary Fund – IMF).
WORLD BANK, Weltentwicklungsbericht; see
At an operational level, one differ-
also: http://www.worldbank.org.
entiates between financial, personal and
technical cooperation. Regarding finan- Hans-Rimbert Hemmer
cial cooperation, capital is put at the dis-
posal of developing countries under
special conditions. This capital usually
Distribution 139
Distribution distribution’. It implies that differences

in service quality justify unequal income
The distribution of →income among levels among people.
people always brings up the question of The remuneration, which is left to
what is ‘fair’ distribution. What exactly the market forces, also liberates per-
constitutes fair distribution cannot be formance incentives which drive eco-
precisely determined either through nomic →growth and technical progress.
science or politics. Criteria and objec- If a significant proportion of the profit
tives are required. Where they come that can be made in the free market is
from and how they can be explained obviated through government interven-
depends on the basic political structure tion or the income-earner is subse-
of the society concerned. In Germany, a quently deprived of it through taxes, the
crucial part of the design is the →social personal desire to perform is weakened.
market economy. The consequences are misdirected capi-
In the →market economy, the rela- tal, for example, to a foreign country or
tionship between →supply and demand into illicit work, causing lost productiv-
determines the price of labour and the ity and weakening economic growth.
employment of capital, and thus the The adherence to the efficiency princi-
personal distribution of work and capi- ple requires that all market participants
tal income. This is why the →achieve- are assured of equal opportunities.
ment principle is the most important Every human being has to be given the
yardstick for income distribution. chance to develop the talents which
This principle states that the total secure him/her an →income in the job
income of the economy has to be divid- market, through appropriate training.
ed among the economic agents in pro- Besides, a reciprocal effect results from
portion to the personal performance the fair distribution of capital assets.
which they have contributed by However, even if these standards are
employing capital and work. Everyone laid down by the national →institutional
is to be remunerated in accordance with order policy, there will always be people
their achievement. This is the ‘justice of who are not able to earn a satisfactory
s3,561)
Average gross private household income in Germany in 2003 (s
earned by assets, employment and public transfer payments
140 Distribution
living through their own individual is supposed to make a certain degree of

achievements. A person’s earning participation in a social life possible.
power may be limited by an inability to Opinions regarding the monetary value
work or by illness or incapacity, or it of the subsistence level differ substan-
may not be able to be realised due to tially. The efficiency principle requires
undeserved →unemployment. There is that the guaranteed minimum income
therefore political consensus on the must not undermine the desire to per-
need for everyone to be guaranteed a form in the sense that it is no longer
minimum income. worthwhile to offer one’s earning
The principle of performance is capacity on the labour market.
thus complemented by the right to a The right to a subsistence level is
living wage. This right is an expression extended by the ‘principle of need’,
of the equality principle, which postu- which means that the distribution of
lates that all human beings are equal. income must suit the unequal needs of
However, a rigorous application of this the economic agents. It is impossible to
principle in the form of an absolutely reach a universal agreement on this
equal income distribution would elimi- issue. An assessment is possible only
nate the principle of efficiency and through dealing with the concrete
would lower the welfare of all econom- problems which approach subsistence
ic subjects drastically. level. A case in point is increased need
In trying to determine the subsis- due to family members. What propor-
tence level, a distinction is made tion of this has to be borne by society is
between the physical and the cultural a very controversial matter.
component. The physical subsistence The principle of need interpreted in
level covers all material goods which are this way, and the right to a subsistence
necessary for survival (food, clothes, level, require an income distribution
shelter). The cultural subsistence level policy which takes effect via income tax
Average net income of the household’s main income recipient for

several job positions in Germany in 2003
Economic ethics 141
and income transfers. These govern- sions and benefits from a minority – be
ment distribution procedures turn the they individuals or →enterprises – can
primary distribution which results from seriously prejudice their competitive
the achievement principle into a sec- market positions, even to the point
ondary distribution. This is an expres- where the actors concerned are forced
sion of the solidarity aspect of the social out of the market and profits dwindle
market economy. for as long as the increased costs are not
When assessing its redistribution offset by benefits which redress the bal-
policies, the →social market economy ance. Under competitive conditions, it
should give preference to the achieve- therefore frequently seems as though
ment principle for the sake of long- morals and self-interest are mutually
term prosperity. exclusive.
Seen in this light, it seems justified
REFERENCES: to postulate that untamed self-interest
GAHLEN, B. et al (ed) (1998), Verteilungs- should be placed under moral restraint.
probleme der Gegenwart, Tübingen; KÜLP, B. This line of argument basically means
(1994), Verteilung. Theorie und Politik, that diagnosis and treatment are both
Stuttgart.
focused on the goodwill of the eco-
Jürgen Siebke
nomic actors: the cause of this predica-
ment is seen to be moral decay, egoism
and greed, while the suggested solution
Economic ethics is a change of heart and a moral about-
turn. The key problem here – and the
Economic ethics are concerned with one which seemingly requires correc-
the question of where moral standards tion – relates to human preferences.
and ideals should have their place under An alternative possible approach
contemporary conditions in an increas- would be to direct one’s attention not
ingly global competitive market econo- so much to the goodwill, but more to
my. the ability of the actors. The issue
It is obvious that the problems that would then no longer be the actors’
economic ethics primarily deal with, preferences but the restrictions to their
such as environmental pollution, cor- acting, i.e. competitive incentives which
ruption, unemployment or poverty, prevent moral behaviour despite one’s
cannot be solved without going beyond better knowledge.
the economic sector. Therefore, more This alternative view of the problem
recent concepts have expanded the goes back a long way. Reference can be
term, interpreting economic ethics as made to Adam Smith, who was a moral
economic moral theory, and thereby philosopher and also the founder of
presupposing a methodical understand- economics as a scientific discipline. His
ing of economics as the general (ration- most significant insight concerns the
al choice) analysis of social interactions uncoupling of the motivation for our
and institutions. actions from their results under com-
The basic problem of economic petitive conditions. This has been classi-
ethics is that morally motivated conces- cally formulated as follows: ‘It is not the
142 Economic ethics
goodwill of the butcher, the brewer or antee of the right to conclude contracts,
the baker which provides us with the institutions which assist in the imple-
food we need, but the fact that they look mentation of contracts, laws against
after their own interests.’ In other restrictive trade, regulations for liabili-
words: the prosperity of all does not ties, etc. Since morally undesirable situ-
depend on the goodwill of individuals. ations are not blamed on moral defects
From this perspective, the motiva- of the participants but on functional
tion for a specific action – i.e. the degree deficits of the system, necessary
of the actors’ self-interest – is less sig- changes have to start with a reform of
nificant than the social compatibility of the system, its incentives and their
the practical expression of this self- effects. Seen in this light, economic
interest or, in other words, to what ethics can also be defined as institution-
extent it benefits society. If a distinction al ethics or as motivational ethics.
is made between the institutional This concept of economic ethics
framework within which our actions takes into account the changes which
take place and the actions themselves – have taken place in the course of the
or, in sportsman’s language, the rules of evolutionary process and which com-
the game and the actual moves – this prise the functional differentiation of
becomes instantly plausible. society into social subsystems. What
In an economy where the actors used to be ‘housekeeping’ turned into a
make profit the aim of their competitive modern national economy and today
moves, it depends on the rules whether even into a world economy. It is charac-
the pursuit of self-interest is to the detri- terised by a high degree of division of
ment of others or to their advantage. labour, by anonymous commercial
The fundamental thesis of economic transactions, by lengthy production
ethics is, therefore: under today’s com- processes under the participation of a
petitive conditions, the institutional large number of actors, increasing
framework has been accorded the posi- interdependence and high complexity.
tion of moral principles. Therefore, the success of a modern
The pronounced emphasis on rules economy does not depend on any indi-
which apply in equal measure to all vidual, any single enterprise or any
competitors is due to the fact that, from country in isolation, which means that
the point of view of competition, the no one (in particular) can be (made)
consequences of moral concessions responsible for it.
must be at least neutral, i.e. they must The resulting major socio-econom-
not create a competitive disadvantage. ic problem of today is the question of
Only in this way can the moral behav- how actions can be socially controlled.
iour of a few be protected from In everyday life, and applied to small,
exploitation by competitors. These manageable groups, informal control
rules or institutions – which are indis- through praise and criticism is possible
pensable if everybody is to be given the and often also sufficient to give moral
chance to benefit from the advantages standards validity.
of competition – include, for example, In large anonymous groups, such as
the right to private property, the guar- today’s global society, it has become
almost impossible and/or very expensive are currently only at a formative stage.
to monitor the behaviour of single indi- But enterprises such as ‘corporate citi-
viduals. This is why the method of con- zens’, just like citizens’ self-help organ-
trol – which is basically indispensable – isations, are increasingly able to influ-
has to be modified: in principle, control ence the basic regulatory conditions of
in a modern society has to take the form institutions, both at national and inter-
of self-control that does not run count- national levels. This means that alterna-
er to the personal interests which, tive models of economic ethics will
through institutionalised incentives, have to prove that they can make a
have been made socially compatible. meaningful contribution by initiating
This transformation of social con- constructive dialogue as well as process-
trol has great potential for individual es of learning between the actors. At the
autonomy and emancipation, but also end of the day, even at the global level
for social productivity and civilisation. we have to make a joint decision on the
It follows from these considerations rules according to which we want to
that economic ethics also give an indi- play.
cation to what extent alternative regula-
tory rules might be suitable in the set- REFERENCES:
ting of moral standards and ideals under HOMANN, K. (1994/2002), Ethik und
competitive conditions. In this regard, Ökonomik: Zur Theoriestrategie der
voluntary individual and collective Wirtschaftsethik, in: Homann, K./Lütge, C.
(ed), Vorteile und Anreise, Tübingen, pp. 45-
commitments have a special place
66; — (2001/2002), Ökonomik: Fortsetzung
because they produce the sorts of reli-
der Ethik mit anderen Mitteln, in:
able expectations of mutual behaviour Homann, K./Lütge, C. (Ed.), Vorteile und
that are needed in a productive cooper- Anreise, Tübingen, pp. 243-266; —
ation. Such rules gain universal validity /SUCHANEK, A. (2000), Ökonomik: Eine
only if the individual can be (sufficient- Einführung, Tübingen; SMITH, A.
ly) sure that the others will equally (1776/1994), An Inquiry into the Nature and
observe these rules. Yet this can be Causes of the Wealth of Nations, edited, with an
expected only if, when everybody obeys introduction, notes, summary, and expand-
the rules, the benefit for each individual ed index by E. Cannan, New York, Toronto;
is greater than a breach (violation of the SUCHANEK, A. (2001), Ökonomische
rules), and if as a result everybody Ethik, Tübingen.
agrees to the enforcement of the rules:
Ingo Pies
rules either have to be, or they have to
Alexandra von Winning
be made, self-enforcing.
Due to the increasing complexity of
modern societies, and particularly in
the case of transnational problems, the Economic orders: Theory
process of the establishment of rules and implementation
can no longer be left to the individual
countries alone. However, political The terms, types and functions of eco-
structures that make the participation of nomic orders are most easily under-
non-governmental agencies possible stood as analogous to a game. All games,
144 Economic orders: Theory and implementation
such as the common ball or card games, Beyond that, there is system-specif-
are based on rules which have a crucial ic interdependence between the differ-
effect on the game itself and indirectly ent sub-orders, i.e. between the coordi-
on the result of the game. In the econ- nating, property, business, financial and
omy, the set of game rules finds its social orders. These mutual dependen-
counterpart in the order. Accordingly, cies can be understood only with the
the economic order covers the whole of necessary knowledge of economic
the officially determined rules as well as orders and how they work. Economic
those which have been spontaneously management was, and is always, in need
agreed to by the market participants. of and dependent on an order (set of
The officially determined rules con- rules and institutions).
sist mainly of regulations from public Of course, there are different ways
or private law that are relevant to the of shaping an economic order, which
economy. Examples are the fundamen- raises the issue of their diverse forms.
tal constitutional laws such as adminis- In this respect, it is important to con-
trative, financial and tax laws, as well as sider the basic problem of economic
social law with its different subdivi- management whereby the scarcity of
sions. In the case of private law (i.e. goods is ever present.
property, contract, business, labour, One of the basic economic princi-
patent or copyright law), the economic ples is that division of labour and spe-
aspect is even more pronounced. cialisation are indispensable for eco-
Finally, the officially determined nomic growth. But as the division and
rules also include the binding agree- specialisation of work becomes ever
ments and statutes that associations and more sophisticated, economic processes
private organisations adopt. These are becoming more confusing and
binding rules, in their entirety, consti- more intertwined. It also becomes
tute the economic constitution as the more difficult to calculate, control and
underlying foundation of the economic distribute goods – bearing in mind
order. The economic constitution is an scarcity and need.
illustration of the interdependence of So far, economists know only two
the economic order with the political ways of tackling the problem of eco-
and legal orders. nomic control and allocation: the
Besides that, economic behaviour, →market economy and a centrally planned
and consequently economic processes, economy (→socialism/planned economy).
are also determined by moral and ethi- In a market economy, the economic
cal rules (usually unwritten), which processes are independently planned by
have developed over time. In modern individuals or economic units, while
terminology, these rules are also called being coordinated via markets and
informal institutions. They illustrate prices. The market economy therefore
the interdependence between the eco- represents a system of decentralised
nomic order and the respective culture. planning and coordination of the eco-
Although not usually recognised, each nomic processes where the degree of
economic order, therefore, is also cul- scarcity of goods is expressed in market
ture specific. prices.
In a centrally planned economy, state, which accepts private property

however, the economic processes are and a market economy, but at the same
planned by one central government time also demands comprehensive gov-
authority and coordinated through a ernment responsibilities regarding the
national plan, whereby the degree of regulation and correction of the market
scarcity is determined by means of a process in favour of social justice and
centrally imposed accounting system. security.
The socialist economies of the The concept of the →social market
recent past are clear proof that a central- economy lies between these positions,
ly planned economy is always coupled which is why some of its intellectual
with a state-planned economy. There- fathers started to refer to it as the →third
fore, individual economic freedom is way. The aim of the social market econ-
not an element of this system. omy is an appropriate synthesis
Socialism failed because of economic between the liberty of the market and
deficits and the lack of freedom in the →social balancing based on government
order, while the market economy has interventions. This means that a bal-
proved its superiority in the economic ance must be found between a liberal
orders’ competition. and a productive – as well as a socially
At the beginning of the 21th centu- fair – economic order.
ry, focus is on the global competition The market and private initiative are
between different market systems. It is seen as indispensable guarantors for
true that all market economies are basi- economic prosperity and the individual
cally barter economies at a more sophis- right to liberty.
ticated level, but it is also true that there Decentralised planning with private
are different concepts which corre- accountability and a market-related bal-
spond with different actual economic ance between supply and demand, pro-
models (→types of market economy, →sys- tect the freedom to consume, free com-
tems competition). This is due to the fact petition and the freedom of occupation,
that basic socio-political objectives such trade, property, contract and associa-
as individual liberty and →social justice tion.
are not always accorded the same value, In a market economy, competition
and this is in turn connected to the is seen as the most effective means of
institutional order policy question of keeping economic power in check. This
what the relationship should be is why the governmental competition
between private responsibility and gov- policy is given priority within the insti-
ernment intervention. tutional order policy instruments. The
On the one side is the liberal con- desired social balancing is aimed at the
cept, which postulates the values of →labour market order and the →social sys-
individual liberty and direct responsi- tem, as well as using a number of socio-
bility, private property, free enterprise political measures. The social market
and →competition, together with legal economy generates a positive result in
protection, performance and a minimal Germany while its adjustment to the
welfare state. The other side is repre- ongoing challenges remains a constant
sented by the concept of the welfare task.
146 Education and research policy
REFERENCES: pupils and students, and to mould, edu-

LEIPOLD, H./PIES, I. (ed) (2000), cate and train the latter in such a way
Ordnungstheorie und Ordnungspolitik. that they are able to use their natural
Konzeptionen und Entwicklungsperspektiven,
talents to their best advantage, both for
Stuttgart.
themselves and for society as a whole.
Helmut Leipold
The educational and scientific institu-
tions are supposed to fulfil this task as
economically as possible, i.e. by allocat-
ing a minimum of resources (function
Education and research policy of allocation).
If an education and science system
At the beginning of the 21st century, are to accomplish this, it must be
education and research policy holds a equipped and organised accordingly. In
key position within economic policy. contrast to the national administration,
This is more than ever because the eco- which is intent on implementing laws
nomic survival and success of the indi- fairly and treating the individual citi-
vidual, and of the economy as a whole, zens as equals before the law, here it is
depend on education and research. The essential to recognise and take into
knowledge and qualifications (skills) account people’s different talents. On
acquired today may become obsolete in the other hand, the various require-
the job market in the near future. This ments of the economy, the state and
applies to skilled workers as well as to society have to be correctly assessed and
engineers and all college graduates. converted into educational goals and
While in the past a solid training contents (curricula) that will shape peo-
tended to be sufficient for the entire ple according to their needs.
duration of a person’s active (working) Since the acquisition of information
life, this ceased to be the case a number about the gifts of individual people and
of years ago because of the rapid techni- the future requirements of the econo-
cal progress and the structural changes my and society is not easy, and since the
of the economy. Today, the efficiency of newly acquired information is
education and science matters more inevitably uncertain, what schools and
than the degree of knowledge and edu- faculties (the education departments of
cation both the individual and the soci- universities) have to accomplish is a
ety as a whole can muster. The main genuinely entrepreneurial task: namely,
task of the education system and its ele- having to act at the risk of making the
ments (schools, universities and other wrong decision. This task differs only
tertiary institutions, and enterprises in terms of content from what the com-
offering basic and further training) is to mercial →entrepreneur has to do in the
communicate the values, attitudes, market at his/her own risk, and which
knowledge, skills and competencies the school and faculty has so far been
which society needs for its communal able to transfer to the pupils and/or stu-
existence, and which the economy and dents.
administration need, as well as to inves- From an organisational perspective,
tigate the talents and inclinations of the it is obvious that a school or faculty
belonging to an administration cannot (school autonomy) granted to them. It

succeed, it has been designed to carry has been recognised that schools have
out orders from above uniformly and to take more responsibility for the task
equally. The educational policy of the ascribed to them and, accordingly, also
Federal Republic of Germany takes this to act more independently.
into consideration, but at times inter- The crucial point, however, is that
prets it in a manner that is outdated. those schools that are funded to a large
Each individual is guaranteed the extent by the cities and municipalities
inviolability of person, free develop- and/or municipality federations, are
ment of the personality, free choice of economically not independent but part
school and free choice of place of train- of the municipal budget. This affects
ing (in the case of minors, indirectly the school buildings, equipment, learn-
through their parental authority). ing materials and non-educational per-
Furthermore, German education policy sonnel (caretakers, secretaries). The
guarantees private school liberty, thus teachers are government employees.
the right to establish private schools, For the universities and other tertiary
and it grants university professors the institutions, the situation is similar: as
liberty to conduct research and to teach. government institutions, they fall under
Teachers and schools have liberty and the state budget.
thus decision-making power only in the The consequence is that schools and
context of legally prescribed curricula universities do not have to take any
and other standards. However, for the financial risks, and they are not eco-
past several years they have had more nomically liable for their educational,
educational liberty and self-sufficiency technical and scientific achievements.
Germany’s education system – key data
Number of pupils (2005/2006) 9,505,241

Number of teachers (2005) 667,711
Number of apprentices (2005) 1,553,437
Number of students (2006/2007) 1,974,932
Approximate expenditures per pupil (2004) in s
– at primary school 4,000
– at senior school 5,400
– at secondary school 4,400
– at grammar school 5,400
– at vocational school 3,300
Average annual total expenditure per apprentice (2000)
– average gross expenditures 16,435
– average net expenditures 8,705
Approximate annual expenditure per student (2000)
– at technical college 6,000
– at university 6,300
Expenditure for Education and Science (2005) 195,2 billion
(8.7% of GNP)
Source: Federal Statistical Office, Federal Institute for Vocational Education and Training
148 Education funding
In recent years, the state has given an equal footing with private (national-
schools, and above all universities, cer- ly recognised) educational institutions,
tain economic decision-making powers and the state would no longer be direct-
through less detailed directives on ing its attention to the production of
where funds are to be spent (increased education – seeing itself as a producer –
budgetary flexibility, unspecified alloca- but rather protecting and promoting
tions), but they do not carry a crucial the educational interests of its citizens.
financial risk. Conflicts arising from the state’s
Finally, teachers and professors are responsibility for what happens at
civil servants and have so far hardly schools and universities and its parallel
been paid a performance-related salary supervisory role (supervision of schools
for their educational and training activ- and universities) would thereby be
ities. It must be added that in Germany, avoided. The state would then be able
the state considers itself as the econom- to focus its attention on the education
ic producer of education and science of its citizens, no matter where they
and behaves accordingly. receive schooling and other tuition,
The consequence is that schools and training and further education, whether
universities are subjected to a large it is in their own federal state or anoth-
number of rules and regulations, and er, or whether at home or abroad. The
they are more inclined to follow gov- state would want to promote the best
ernment directives than to act in the schools, universities and other academ-
interest of the educational, training and ic institutions in its own territory.
further education needs of their pupils
and students. This means that schools REFERENCES:
and universities produce graduates, but Internet: www. rhein-ruhr-institut.de; on

without either being truly interested in SCHULFÖRDERVEREIN, see:
www.schulfoerderverein.de.
their vocational progress or drawing
conclusions from it for their own work,
Ulrich van Lith
in the way profit-orientated enterprises
with a presence in the market do as a
matter of course and with sophisticated
methods. Education funding
Discussions on potential reforms
are therefore now under way, focused Education (school and university edu-
on the question of whether or not the cation, vocational training and further
state ought to accord universities and education) is a solid investment in one’s
schools more autonomy, while limiting own abilities and talents, as well as an
its own influence to the basic condi- investment in national wealth. The lat-
tions (minimum standards, market and ter consists of human capital (human
achievement transparency, compulsory capital reserves) and the real wealth of a
schooling), which form the background country.
for their →competition for pupils and The cost of this investment – in the
students. Under these conditions, pub- form of ‘learning costs’ (personal com-
lic schools and universities would be on mitment while forgoing other activities
such as recreation or volunteering, costs and at least 4.5 years of tertiary educa-
of material such as school books, per- tion). At the same time, the education
sonal computer, etc.) – has to be cov- costs are due for payment, while the
ered by the pupils, students, trainees future rewards are uncertain.
and individuals in further education It also has to be remembered that
themselves. For the supplier of educa- most pupils are minors who are not
tion (school, tertiary institution, enter- legally competent or able to judge the
prise), they take the form of ‘tuition value of education at all. However, as a
costs’. Unlike the costs of this invest- rule, it should be possible to rely on the
ment, the proceeds usually follow only parents or guardians – who, in the con-
years after the school, the course of text of their maintenance obligations
study or the professional training has have to provide education and training
been completed. Only then will the (including school education) to carry its
individual and the economy as a whole costs and, if necessary, to pay in advance.
reap the rewards from the newly The logical consequence of this
acquired knowledge and skills (higher would be that later, when education
financial income, non-material advan- investments have started to generate
tages such as social status, etc.) which, rewards, parents could claim repayment
without the investment in education or support during their retirement years
and/or training, would not have been – as is the case in numerous cultures
obtained. where the family and the different gen-
An investment is profitable when erations of a family still exhibit a high
the total rewards exceed the total costs, degree of cohesion and form an eco-
in this case the learning and tuition nomic unit (e.g. in Asian countries).
costs. If the tuition costs are carried by In Germany, the state has in the past
the state, personal education becomes taken on the costs of school and univer-
profitable as soon as the personal sity education in their totality (zero tar-
rewards exceed the learning costs. iff), but in 2007 some university fees
The gap between the accumulation were introduced. This represents con-
of the costs (price) for education and its siderable savings for the family, and the
rewards creates the problem of educa- mandatory long-standing →pension
tion financing: money has to be spent insurance supports the view that the edu-
on teaching (cost of instruction and/or cation of children has to be regarded as
of a place at school, university or at an a substantial part of the retirement pro-
institution of training or further educa- vision. Beyond that, and independently
tion) and on learning (living expenses; of the family income, the state con-
personal commitment is a subjective tributes to learning costs through main-
sacrifice, but does not entail any expen- tenance payments in the context of the
diture or payment). family burden compensation (e.g. con-
The problem of education funding tinued payment of child benefits after
is exacerbated by the fact that the fund- the age of 18 and up to the age of 26,
ing of school and university education while children in training) and the
involves long time periods (e.g. in Federal Law on Education and Training
Germany 10 or 12–13 years of school Promotion.
The funding of educational invest- (financial income) only if an income

ments (investments in human capital) results after the completion of the train-
becomes a problem and requires the ing. But here, too, access may be limit-
state to take on a subsidiary function for ed insofar as it is non-attachable. Above
individuals or their families who do not all, the credit-giver does not know
have the means. Contrary to invest- whether years later, for example, after
ments in capital equipment, which completion of a programme of study,
enable the investor to borrow the nec- the borrower will be prepared to begin
essary funds on the capital market, this working (starting a family, maternity) or
is not possible with investments in become unemployed or unintentional-
human capital. This is because the ly avoid repayment (change of address,
credit-giver requires collateral in order move abroad, false income data).
to reduce the risk of non-repayment. If For these reasons, banks are only
real wealth is accumulated, this could prepared to advance the finance for
be assigned as security. In the case of school attendance or a course of study if
human capital, however, that is not pos- they obtain other collateral (material
sible, since fundamental liberties (in- property, parental surety, etc.). It there-
violability of the person, inalienability, fore improves efficiency if the state
prohibition of hard labour) make it undertakes the pre-financing in all cases
impossible to seize human capital. in which a pre-financing (loan financ-
Therefore the credit-giver can ing) of profitable educational invest-
resort to seizing the monetary proceeds ments would otherwise not take place.
Private education funding in Germany
Funding for instruction costs Funding for learning costs
(The costs of a place at school, university or (Transport costs, learning materials such as
training college ) school books, software, notebooks, living
expenses)
• through prices and fees (beneficiary
pays) school and university fees, previ- • through own resources (savings), parental
ously also apprenticeship fees for voca- means
tional training (for government institutions: • through bursaries, etc., private contribu-
school and university fees ) tions from third parties
• through voluntary contributions (direct • through gainful employment, additional
donations or via school or university occupations (self-employed or employed)
trusts)
• cash donations (indirectly also material
donations and voluntary work by parents,
pupils, students and others), endowments
• through additional contributions
– sponsoring, advertising, selling promo-
tional items such as T-shirts etc., letting
premises, the sale of services such as
computer training, etc.
If this is not done, a loss for the indi- has its limits. It is successful only when
vidual as well as for the society as a companies and enterprises are ready to
whole will result. For practical reasons, offer training places. In the past,
the state usually covers tuition costs in trainees had to pay an apprenticeship
total for the duration of compulsory premium in order to make the compa-
schooling, and in Germany even nies more eager to offer training. Today,
beyond that, i.e. senior high school and once again, the state takes over by giv-
higher education. In 2007 university ing the companies handouts or tax
fees were introduced. In addition, child incentives in these cases, which is basi-
benefits, the Federal Law on Education cally the same as partial pre-financing.
and Training Promotion and tax advan- If we differentiate education fund-
tages represent government contribu- ing according to the criterion of who
tions to the cost of living. receives direct payments, then in prin-
While these financing difficulties ciple two methods of education fund-
apply to school and university education ing can be distinguished: ‘supply fund-
and are a challenge for the government, ing’ and ‘demand funding’.
in the vocational part of education In supply funding, places at schools,
(training and further education) the sit- tertiary institutions or training institu-
uation is different: on the one hand, in tions are directly funded by govern-
vocational training the gap between ment. The respective institution
costs and proceeds is significantly nar- receives the funds according to certain
rower. Besides, in many professions the criteria (ratio of pupils, students, gradu-
yields (productive contributions by the ates, capacity regulation). The supply
trainees to the operational result of the funding has to clearly distinguish who
enterprise) already cover the training the carriers are of the schools, universi-
costs during the period of training. ties and training facilities and who is
On the other hand, the training responsible for the education and/or the
companies and →enterprises, unlike training (education production). This
banks and other financial institutions, does not always have to be the state, but
are prepared to pre-finance the costs of it can be private schools or independent
the training. They do this because they public schools. In demand funding, the
have selected the trainees themselves, pupil (parents) and/or the student
knowing which qualifications the com- receives the financial means for the
pany will require in the future, and in financing of a place at a school, univer-
the sure knowledge that they will be sity, institution of training or further
employing some of their own trainees education of choice. This can take the
in a regular employer–employee rela- form of tied assignments, education
tionship after the completion of their coupons or loans with different payback
training. To provisionally meet training conditions (see box, next page).
costs by pre-financing them is more This sort of education funding
convenient for them than having to makes clear that national education
recruit new skilled labour in the market production and national education
place at higher wages. However, this funding are two different issues.
method of financing vocational training Logically, the latter would also open up
Government education funding in Germany
Supply-orientated funding Demand-orientated funding
(funds go directly to the school or the univer- for instruction and learning costs, whether
sity) intended for a specific purpose or not
• Institutional funding, structured budget • independent of the family income

(detailed itemised instructions for means – fixed amount per capita/ year and/or term
allocation, not directly related to the serv- covering all or part of the costs
ice rendered) – per unit (e.g. teaching unit, lecture), as a
subsidy covering all or part of the costs
Deficit financing of the unit
e.g. for officially recognised private schools
• income-linked, per capita and graded as
• flexible budget (limited transferability of educational subsidy, in voucher form or in
budget positions in terms of time and the form of tax concessions deductible in
material) retrospect from the payable income tax in
absolute amounts up to a maximum
• total budget: according to key data and amount (civil tax, negative income tax,
discretionary (performance-related) when the deductible amount exceeds the
payable income tax: net payment)
• according to key data, e.g. number of
pupils, school-leavers; per capita alloca- • tax-deductible from the taxable income up
tions, flat-rate e.g. as a flat-rate allocation to a certain amount, e.g. as contingent
per pupil at private schools in certain fed- expenses
eral states (Baden-Württemberg, Lower
Saxony and others) • in the form of a loan with fixed or income-
linked repayments with or without sub-
sidised interest, government bond with
special provision for repayment dispensa-
tion such as pregnancy, unemployment,
disability, death, etc.
• as a combination of grant and loan: e.g.

the Federal Law on Education and
Training Promotion and the master crafts-
men training scheme
• other concessions (subsidies) for health

and pension insurance (credited assimilat-
ed periods), rental, subsidised entrance
fees to public amenities such as muse-
ums, theatres, etc.
Employment 153
the possibility of funding schooling or a Economists are concerned with

study course abroad. One prerequisite unemployment in order to determine
will generally be that the educational its causes and to give politicians recom-
institutions should either be govern- mendations on economic policy. In
ment schools or universities; or that principle, the level of employment
they should otherwise be officially results from the interaction between
accredited (approved schools, chartered the supply of and the demand for
universities). labour. The excess supply on the labour
For the development of a European market is usually calculated only against
education market, this form of funding the level of unemployment, although
carries special importance. It demon- an additional number of potential sup-
strates that the state has to support its pliers of labour may have ‘quietly’ with-
citizens with the funding of their edu- drawn without being entered into the
cation and training, and that citizens unemployment register.
have to be allowed to decide freely,
within reason, at which school or uni- Components of unemployment
versity they would like to acquire their Despite the multiple forms of unem-
knowledge – state or privately run, at ployment, it is useful to divide the
home or abroad. number of unemployed into a friction-
al-structural component and into a sur-
REFERENCES: plus of supply.
LITH, U. van (1985), Der Markt als
Ordnungsprinzip des Bildungsbereichs, Frictional-structural component
Verfügungsrechte, Ökonomische Effizienz und die
Frictional and/or structural unemploy-
Finanzierung schulischer und akademischer
ment is attributed to placement obsta-
Bildung, Munich; — (1998), Bildungsuntern-
ehmertum, seine institutionellen Bedingungen,
cles between →supply and demand on
Finanzierung, Kosten und Nutzen der Bildung, the job market. This is because both
Mülheim a. d. R.; — (1999), Fortentwicklung labour supply and labour demand are
der einzelbetrieblichen Finanzierung der subject to different requirements
Berufsbildung, in: Handbuch der Aus- und regarding regional availability, qualifica-
Weiterbildung, Ergänzungslieferung 118, June tions, etc. This causes difficulties in
1999, Cologne. matching job-seekers to job vacancies –
a situation reflected in the coexistence
Ulrich van Lith of unemployed persons and vacancies.
In any market economy, a certain
amount of unemployment is inevitable
Employment in spite of the full range of economic
policy measures. Above all, this fric-
The problem of →unemployment has tional and/or structural unemployment
immediate and lasting consequences is also indicative of the continuing
(reduced standard of living, psycholog- structural transformation that can be
ical problems). Economic policy there- expected in economically normal times,
fore gives priority to job creation and and which continually causes long-
the fight against unemployment. standing jobs to be disposed of and new
154 Employment
ones to be created. The fact that this There are two ways to attempt an
transformation cannot occur complete- explanation: The ‘long-term unem-
ly without friction (thus without diffi- ployment theory’ states that while they
culties and/or temporary delay), leads to are jobless, unemployed individuals
the permanent phenomenon of an lose qualifications and that, in this way,
unemployment ratio. the number of long-term unemployed
This natural unemployment ratio rises.
(natural rate of unemployment: NRU) The ‘insider outsider theory’ stress-
describes the average level of unem- es the power of those in jobs, who can
ployment around which the statistically prevent necessary wage reductions and
measured unemployment varies in thus keep outsiders (unemployed per-
terms of duration. It is actually anything sons) away from the labour process.
but natural and is determined by the
ratio of those employer–employee rela- Surplus supply
tionships which have been dissolved Surplus supply – the second compo-
and those which have been newly nent of unemployment – is the differ-
formed (more exactly: probabilities of ence between the total labour supply
dismissal and of reinstatement). These and the number of workers required by
two regulating factors are especially →enterprises. For the analysis of the sur-
affected by welfare transfers, minimum plus supply, two models are available:
wage legislation, protection against while the neo-classical school always
unfair dismissal regulations as well as attributes a surplus supply in the job
protection against structural change, market to inflated wages in real terms,
created as a social cushioning against and the responsibility for the level of
unemployment. employment to the parties to a collec-
A high and permanently granted tive agreement, the Keynesian opposite
wage compensation (unemployment standpoint claims that imbalances in
pay), for example, reduces the labour the labour market reflect a true lack of
supply since it lowers the incentive for real demand for the products of the
workers to take up new positions. economy.
Those who are employed approve of In an unemployment situation,
this, since their competition by unem- therefore, a wage reduction in real
ployed persons is reduced. terms and/or the stimulation of the
A new explanation by the NRU demand for goods appear indicated if
offers the ‘hysteresis theory’: generally, unemployment is supposed to decrease.
the term hysteresis describes the long- The crucial variables combined – espe-
term influence of past historical or eco- cially price level, consumer demand for
nomic events on the natural ratio. For goods, employment and wages in real
the NRU, this particularly means that terms – represent a ‘simultaneous sys-
the NRU will rise during the current tem connection’, which cannot be so
period if the actual unemployment ratio easily manipulated by the economic
of the preceding period exceeded the policy-makers.
NRU of the preliminary period (time- It has been shown that the relation-
path dependence). ship of consumer demand for goods
Employment 155
and nominal wages is relevant to the law (unemployment goes down when
determination of the employment level. the economic growth rate rises). How-
Monetary, fiscal and tariff policies can ever, no quantity or quality of →growth
have an impact on this relationship. leads directly to a lower unemployment
rate. The unemployment ratio remains
Beveridge curve unchanged if the actual growth of GDP
The Beveridge curve was named after corresponds to ‘natural’ growth of the
Lord Beveridge, scientist and English GDP. This ‘normal’ growth is based on
employment minister after the Second population increase, the accumulation
World War. It makes it possible to divide of capital and technical progress. If,
the unemployment ratio into the com- however, actual economic growth
ponents specified above, and describes exceeds normal growth, then the
the negative convex connection unemployment ratio goes down. Due
between the unemployment ratio and to this feature, the natural GDP growth
the ratio of vacancies. An increase of is also called the ‘occupation threshold’.
open places thus leads to a lowering of In the United States, during the
the unemployment ratio and vice versa. 1960–1998 period, the occupation
The extent of the frictional-structur- threshold was about 3%.
al component of unemployment can be
expressed through the spatial layout of Price level stability
the Beveridge curve. On the other hand, During the 1960s and 1970s, a negative
the supply and demand constellation in relationship between inflation rate and
the labour market determines where on average unemployment ratio (low
a given Beveridge curve we are. unemployment plus higher inflation
rate and vice versa) was discussed as the
Magic square Phillips Curve. It was assumed that
Economic policy, besides aiming at a economic policy could choose (trade
high level of employment, subscribes to off) between the two goals: an unem-
three further macroeconomic goals (the ployment ratio which is pleasing to the
Law for Stability and Growth of 8 June government can be ‘bought’ by an
1967). However, since some of these appropriate inflation rate. This relation-
cannot be realised simultaneously ship could be observed only in the short
(→conflicting goals in economic policy), it is term and under certain conditions. In
called the ‘magic square’ of economic the long term, however, one cannot
policy. choose between unemployment and
the inflation rate since during the wage-
Appropriate and ongoing economic growth fixing process, the parties to a wage
Economic growth is defined as the dif- agreement anticipate the government’s
ferential when comparing the current readiness to produce inflation and their
gross domestic product (GDP) to that wage demands are based on this antici-
of the same period of the previous year. pation. In the long term, therefore,
The negative relationship between prices and wages rise at the same rate,
unemployment and GDP which can be and real wages (wages divided by the
observed in reality is called the Okun’s price level) continue to be the most
156 Employment
important assessment ratio for employ- sis’) have increased. Through these
ment. This also explains the phenome- endogenous effects of the monetary
non of stagflation: despite higher union, conflicting aims can be avoided.
unemployment, price levels continue to Flexible exchange rates mean that con-
rise. Thanks to steady and predictable flicts between domestic economic sta-
monetary policy measures by the cen- bility goals and the balance of payments
tral bank, →price level stability thus forms equilibrium are largely avoided or
the indispensable foundation for an solved through exchange rate adjust-
adequate employment increase. ments. A condition for this is, however,
that the exchange rate adjusts in a sys-
Balance of payments tematic and foreseeable way to changes
Especially in the Federal Republic of of fundamental economic data (prices,
Germany, turning points in the econo- →income).
my were repeatedly initiated through Conflicts between the goal of a high
changes in the level of the foreign con- level of employment and the three other
tribution. To that extent, there is no goals of the ‘magic square’ are generally
empirically justified contradiction not an issue when prices, rates of pay
between the goal of a →balance of pay- and interest rates are allowed to find
ments equilibrium and the goal of full their levels as freely as possible, when
employment. However, an increase in →competition is reinforced and when a
exports does not necessarily lead to an steady monetary policy is practiced. To
improvement of the labour market sit- get rid of unemployment, the sup-
uation. Rigidities in labour markets, porters of the hysteresis theory there-
such as high recruitment and dismissal fore suggest complementing expansive
costs or immobility of the workers, may demand policies (lower interest rates,
slow down the incentive for additional expansive fiscal policy) with supply
employment. measures that are aimed at greater flexi-
The type of exchange rate system bility (incentives for investment, wage
that is implemented also plays a role restraint) (a two-handed approach).
(→currency system and exchange rate
regimes). If in the interest of one’s major REFERENCES:
trading partners one opts for the elimi- BELKE, A. (2001), Wechselkursschwankungen,
nation of the risk of monetary fluctua- Außenhandel und Beschäftigung, Berlin et al;
FRANZ, W. (1999), Arbeitsmarktökonomik,
tions by fixing the exchange rate irrevo-
4th edition., Berlin et al; LANDMANN,
cably in, for example, a monetary
O./JERGER, J. (1999), Beschäftigungstheorie,
union, the negative effects of hyper- Berlin et al; INSTITUT FÜR ARBEITS-
inflated wage agreements on the labour MARKT- UND BERUFSFORSCHUNG
market can no longer be balanced by a (IAB) der Bundesanstalt für Arbeit: http://
devaluation of the domestic currency. www.iab.de/iab/publikationen/themen.htm.
This may mean that the competition
between country-specific job regula- Ansgar Belke
tions rises (→system competition). Frank Baumgärtner
Incentives for structural reforms on
sclerotic labour markets (‘euro-sclero-
Employment policy demand side of the labour market. In

practice, the emphasis of employment
Areas of employment policy policy strategies lies in the measures
In the economic policy debate, employ- geared at the demand side.
ment policy is frequently equated with
concepts which concern only their sub- Strategies geared at the supply side of the
divisions (e.g. labour market policy). labour market
The term ‘employment policy’ refers to Decreased labour volume is brought
all economic policy activities that deal about by the reduction of the number
with labour as a factor of production and of potential wage-earners (demograph-
have an impact on the employment sit- ic component, decreasing desire to be
uation. In this regard, it is basically those gainfully employed, migration trends)
individuals in gainful and dependant or by a reduction of working hours
employment who are at stake. (→collective agreements, e.g. the standard-
‘Labour market policy’, however, is isation of a shorter work week or longer
a name for measures that try to affect vacations or individual regulations).
supply and demand on the job market
and the way they relate directly. This Strategies geared at the demand side of the
means that employment policy covers a labour market
larger field than labour policy only. Here, the target is an increased demand
Beyond that, employment policy entails for labour since the job market is
employment-promoting measures derived from the goods market and the
which, strictly speaking, belong to the demand for work depends on planned
sectors of economic policy, growth and goods production. Strategies having an
structural policy. impact on employment must therefore
The largest part of wage policy as be geared at the production volume:
well as →Concerted Action/Alliance for
Employment can also be subsumed • Business cycle policy actions
under employment policy. Above and (increasing total demand through
beyond the (sub-)divisions mentioned expansive monetary and fiscal policy
here, employment policy as a generic →business cycle policy).
term is closely related to other political
fields, e.g. to →social policy. The quanti- • Structural policy measures (promo-
tative goal of employment policy lies in tion of structural change →structural
reaching a high level of employment. policy).
Strategies of employment policy • Growth policy measures (in times of

Strategies and instruments of employ- continually poor growth). How many
ment policy are supposed to redress the additional jobs this yields, though,
imbalance between labour supply and crucially depends on the develop-
labour demand and thus to reduce ment of economic growth and overall
→unemployment. In principle there are economic productivity, i.e. starting
two different ways of tackling this: from which growth rate total
either from the supply side or from the employment figures rise (‘employ-
158 Employment policy
ment’, e.g. West Germany 1987-1993 es (→collective agreements). The attempt

0.7%). to maximise the wage ratio (proportion
of earnings of the national revenue
Wage policy and labour market derived from employment-based jobs)
On the German labour market, wage- through higher wage demands is use-
fixing is not consequent upon the free less in that it simply substitutes the
play of →supply and demand. Rather, it is labour factor with the capital factor
the result of nominal wage negotiations (rationalisation).
between trade unions and employers’
associations in the context of bargaining Wage levels and employment
autonomy (Article 9(3) of the Basic In the current debate on the high
Law). unemployment ratio and its causes, the
Through the labour market regula- argument that wage levels in real terms
tions, the parties to a collective agree- are too high, as well as the consequent
ment have been given considerable recommendation to slow down wage
responsibility in the field of employ- level development in order to increase
ment policy (employment policy employment, plays an important role.
assignment). The demand for work decreases
Therefore, tariff policy must con- proportionally to the increase of pro-
tribute to the preservation of existing duction costs. Not only is the increas-
and the creation of new jobs and, by ingly expensive factor ‘labour’ replaced
leaving sufficient scope for regional and by the relatively less expensive factor
industry-related differences, as well as ‘capital’, shrinking profits lead to fewer
for differences of qualification and the investments. Thus the neo-classical
special situation of individual enterpris- labour theory sees the cause for unem-
Fluctuations in the German job market, 1996 and 2005 (in 1,000)
West Germany East Germany

1996 2005 1996 2005
Outgoing (leaving) unemployed 4,684 4,609 2,101 2,256
Incoming (entering) unemployed 4,967 4,823 2,175 2,163

Of these:
– currently employed (not gainful) 2,511 2,082 1,287 1,035
– apprenticeship 129 238 50 105
– previously unemployed 2,388 2,503 838 1,023
Incoming job vacancies 2,388 2,021 890 710

Successful job procurement 2,553 2,601 811 917
(year 2000) (year 2000)
Average duration of
unemployment (in weeks) 29.3 36.3 27.9 46.3
Source: Federal Employment Agency: Labour Market 2005

ployment primarily in the wage • redistributive wage policy (+ redistri-

monopoly of the workers’ and the bution surcharge in accordance with
employers’ associations. The tariff purchasing power argument)
wages negotiated by them usually have
the effect of a minimum price (mini- Alliance for Employment
mum wage), which is fixed above equi- At a summit on 7 December 1998, the
librium level (→labour market order). federal government as well as represen-
tatives of the trade associations and the
Pay structure and employment trade unions agreed to work together in
Additionally, a faulty pay ‘structure’ has an alliance towards a reduction of
been made jointly responsible for the unemployment and, in addition, to
employment problems. In terms of make the economy stronger and more
industry, qualifications and region, competitive in the long term.
wages do not correspond to the specific It was felt that for a positive devel-
conditions of supply and demand (mis- opment in the labour and professional
match). This leads to misguided poli- training markets, a ‘durable cooperation
cies regarding production and employ- and understanding between the state,
ment structures, and to a decrease of the trade unions and the economy’ is
the potential employment volume. required.
Yet the Keynesian opponents of this The parties involved in the Alliance
position interpret wages as income for Employment, Education and
creating demand, and conclude that if Competitive Ability are, among other
because of rising wages demand grows, things, aiming at a further sustainable
production and employment are reduction of the legal marginal wage
expanded (purchasing power argu- costs, as well as a structural reform of
ment) →Keynesianism. the social security system.
Wage fixing in the context of bargaining REFERENCES:
autonomy Sources for the representation and evalua-

Four concepts of wage policy can be tion of employment policy measures avail-
able at www.iab.de/iab/publikationen/publika-
distinguished:
tionen.htm; www.zew.de; www.ilo. org.
• productivity-based wage policy Ansgar Belke

(nominal wage increase = rate of
growth of the overall economic pro-
ductivity) Enterprise, plant
• cost level neutral wage policy (wage The main competence of an enterprise
increase = growth rate of productivity or business is its ability to establish
+/- change of non-wage related costs) products and services through →compe-
tition in the national and international
• cost level neutral wage policy (as markets. To succeed in this requires
above + increase for prospective competitive advantages, which may be
unavoidable price level increase) located in such different areas as:
160 Enterprise, plant
• the product, manufacturing tech- strategic alliances are developing. Here,

nique, production costs as well as it is basically no longer possible to
service quality; assume an economic or legal entity.
Markets are becoming more interna-
• the sales network, brand name and tional (→globalisation), and enterprises
product image; and have to follow this trend in order to
remain competitive.
• the ability to stay at the cutting edge In their desire to service the interna-
of technology through high quality tional markets, enterprises are concen-
innovations. trating on location factors. Despite
numerous location advantages in
While private enterprises usually Germany, such as the dual education
want to make a profit, with the share- system and the good infrastructure,
holders bearing the risks and responsi- international investors react with cau-
bilities of running a business, public tion regarding over-regulation especial-
enterprises are focused on providing a ly of the →labour market, as well as the
service at government request (→public singularly high level of →co-determina-
enterprises). The federal government, tion. This explains the small percentage
federal states or municipalities – and of foreign direct investment in
thus at the end of the day the taxpayer – Germany compared with other OECD
carry the risks and liabilities. countries.
In normal everyday usage, the terms In recent years, the topic of corpo-
‘enterprise’ and ‘plant’ or ‘factory’ tend rate governance has gained in signifi-
to be used as synonyms. From the busi- cance. Legally and formally, the control
ness management point of view, the of a company and its executive commit-
term enterprise/business puts more tees lies with the supervisory board, the
emphasis on the financial and legal actual controlling body of a company.
entity (external view). The term plant The supervisory board is usually elect-
or factory, on the other hand, describes ed by the shareholders at annual gener-
a local or technical and organisational al meetings.
economic unit (internal view). As the international financial mar-
Since the emergence of the internet kets are opening up, however, the
economy and the →new economy, these supervision of companies is largely per-
old-fashioned definitions have become formed through the submission of
increasingly fluid: thus today, ‘virtual financial statements and transparent
enterprises’ are networks of independ- reporting in the capital markets.
ent companies that come together only Regarding the possible legal forms, a
for a short time – for example, to com- distinction has to be made particularly
bine core competences or for the pro- between sole traders, non-incorporated
duction of certain products or services. firms and corporations: according to
For higher visibility in the interna- sales tax statistics, most of the business-
tional markets, new organisational es in Germany are run as sole traders
forms such as joint ventures (several (more than 2 million in 2001). The spe-
enterprises start a joint enterprise) or cial features of the sole trader are the
exclusive decision-making powers and Medium-sized businesses employ

the sole right of disposal, while liability more than two-thirds of the entire
for the commitments of the company workforce in the private sector in
extends to all personal assets (business Germany and are responsible for 48.8%
and private assets). But →property also of the gross annual product. But the
holds a social obligation. Business deci- large-scale enterprises with more than
sions are not arbitrary. The practical 500 employees, which make up less
side of running a company demands the than a quarter of 1%, are responsible for
inclusion of the staff on issues that con- more than 50% of the entire sales vol-
cern the business. ume.
Non-incorporated firms require at The 25 largest enterprises in
least two associates. Here, too, capital Germany were already large by 1960. In
and management are usually located in the United States, however, one-third
the same persons. With the exception of of the top 25 companies are newcomers
the limited partners in a limited part- which were started only in recent years
nership (their liability is limited to the – especially in the field of information
level of the deposit) partners are also technology.
liable to the extent of their total assets.
The most common legal forms are the REFERENCES:
general partnership (more than a quar- JESKE, J./BARBIER, H. D (2000),

ter of a million enterprises in 2001) and Handbuch Wirtschaft: So nutzt man den
Wirtschaftsteil einer Tageszeitung, a
the limited partnership (more than
Frankfurt/M.; VAHLENS KOMPENDI-
100,000 enterprises in 2001).
UM der Betriebswirtschaftslehre 1 (1984/1998),
In corporations, liability is limited Munich; WOLTER, H.-J./WOLFF, K./
to the capital of the company as a legal FREUND, W. (1998), Das virtuelle
entity. Investors and management are Unternehmen: Eine Organisationsform für den
frequently separate. The most common Mittelstand, Wiesbaden.
corporate legal form is the limited lia-
bility company or Ltd (nearly half a Kurt J. Lauk
million enterprises in 2001). Only Rainer Gerding
6,856 companies (in 2001) were regis-
tered as legal corporations (public lim-
ited company). Entrepreneur, manager
It is certainly striking that in Originally, the term entrepreneur used
Germany, medium-sized companies to refer mainly to the owner or pro-
predominate: 89.9% of businesses have prietor of a business, running an
a staff complement of less than 20 and →enterprise independently and at his or
99.8% have fewer than 500 employees. her own risk, by being liable with the
In terms of staff numbers, this means capital of the business or with his or her
that only 0.2% of businesses can be clas- total personal assets. The source of cap-
sified as large enterprises. The result is ital and the entrepreneur were one and
similar – depending upon the industry the same. The first listed companies
– in the ranking order based on sales during the 19th century brought with
volumes. them the new phenomenon of the
162 Entrepreneur, manager
employee-entrepreneur or manager. By way of markets and →competition,

He also has far-reaching entrepreneur- a dynamic that starts off as commercial
ial decision-making powers, but he is self-interest ends with optimum fulfil-
acting on behalf of and at the risk of ment of consumer desires (potential
others. Through share options (salary sales) and an increase in the general
payment in the form of an option level of prosperity. But economic
between money or shares in the busi- renewal and structural change do not
ness) the manager, too, can become a make the temporary loss of unprof-
joint owner or shareholder in the enter- itable jobs a thing of the past.
prise. Supervision of the company’s Entrepreneurial →competition and mar-
executive committee is incumbent ket selection are the best way of return-
upon the supervisory board. Changes ing to full employment and remaining
among the managerial staff are normal. competitive through innovations,
More than 94% of the 3.1 million regained competitive ability and eco-
enterprises in Germany are owner- nomic →growth.
managed, while just under 5% are cor- The economic and socio-political
porations and as such run by managers joint responsibility of the entrepreneur
who are company employees. Entrep- develops in the age of →globalisation and
reneurs are flexible: they can decide internet economy in a new field of ten-
when what is produced, where and sion. New international production
how. This makes location factors so processes and business models, and
important, including legal, tax, financial international competition for the pre-
and social systems, as well as the quali- dominantly regionally active suppliers
ty of education, the proximity of uni- contribute to a drastic aggravation of
versities and the transport and service the international location competition.
infrastructure (→system competition). Accelerated decision-making must be
The greatest challenge for entrepre- supported by flatter enterprise hierar-
neurs is their role as innovators who, chies.
within the framework of the →market The exaggerated focus on share-
economy, have to use personal initiative holder value, to which entrepreneurs
to make profits while being prepared to and managers have been subjected, is
perform, to take risks, and to improve wrong. Lasting entrepreneurial success
company results. can be achieved only with the coopera-
The practical application of invention of the workforce, especially under
tions, the continual renewal of products most difficult competitive conditions.
and production processes, as well as the The interests of the business owners
opening up of new markets are all gen- and the workers are therefore only
uine entrepreneurial tasks, and it is in seemingly opposed to each other.
this spirit that the Austrian economist Germany needs to adopt a new
Joseph Alois Schumpeter coined the entrepreneurial mentality: international
term ‘creative entrepreneur’ or ‘pioneer investigations prove that regions with
entrepreneur’. Drive, creativity and the highest growth rate of new busi-
organisational and people skills are all nesses, for example, the United States,
essential core competences in business. Canada, Spain and Ireland, also have
relatively higher economic and employ- venture capital markets and a competi-
ment growth. tion-orientated transformation of the
It is true that the number of new education system.
businesses which were established in Creativity, →individual responsibility,
Germany since the end of the 1990s being prepared to take risks and leader-
had increased to 761,000 a year. A sur- ship skills must become priorities in
vey of bank accounts shows, however, basic and further training. But it is
that since the beginning of the 1960s equally important that within the popu-
the proportion of people who are self- lation there is a growing awareness of
employed has decreased in relation to the crucial role of the entrepreneur for
the total number of people in gainful the efficiency of the entire national
employment from just under 17% to economy.
just more than 10%. These values place
Germany far below the European REFERENCES:
Union average of 15%. HAMER, E. (2001), Was ist ein Unternehmer?:

The new reality of company estab- Was verdanken ihm Betrieb und Gesellschaft?,
Munich; RODENSTOCK, R. (2001),
lishments requires a stronger integra-
Chancen für Alle: Die Neue Soziale
tion of the international capital markets.
Marktwirtschaft, Cologne; SCHUMPETER,
While the German financial system is J. A. (1942), Capitalism, Socialism and
frequently based on long-term personal Democracy, New York; SINN, H.-W. (1999),
relationships between enterprises and Die Rolle des Unternehmers in der
financial establishments that are not Marktwirtschaft, in: Eliten und Demokratie,
very transparent, the Anglo-Saxon sys- Berlin, pp. 111-124.
tem must rather be described as
reserved, short-term and largely trans- Kurt J. Lauk
parent. The differences between the Rainer Gerding
two cultures are becoming more and
more apparent. Against this background
it is interesting to observe that in recent Environmental impact
years, particularly in the new technolo-
gies in the United States, innovation Environmental impact studies distin-
and growth have been far stronger than guish between global and regional envi-
in the economic systems of Europe, ronmental problems. The former are
which are less willing to undergo on the increase. Here, local activities
reforms and are held back by rigid (the running of factories, the mining of
social systems and the lack of venture resources or the dumping of materials)
capital. have global effects and demand con-
The readiness to engage in private certed action by as many countries as
business activities is crucially to be sup- possible, and possibly by all. Regional
ported by the removal of government environmental problems, however,
regulations in almost every economic usually result when local uses of the
sector, lower taxes and contributions, environment for the purposes of pro-
continued fearless →privatisation poli- duction or consumption have an impact
cies, →deregulation, the promotion of only on the immediate environment.
164 Environmental impact
As far as regional impact phenome- deterioration of the fresh water supply,

na within the borders of a country are the decreasing diversity of species (bio-
concerned, the national environmental diversity), the reduction and qualitative
policy is faced with a challenge. deterioration of the soil (desertifica-
Globally, it is above all the saturation of tion), and the over-use of the world’s
the earth’s atmosphere with green- oceans (through over-fishing and
house gases and the shrinking ozone excessive inflow of pollutants), which
layer, the quantitative and qualitative play an important role.
Air pollution in Germany, 1990–2004

Environmental policy: Actors 165
Carbon dioxide (CO2) is the most Environmental policy: Actors

abundant greenhouse gas. Up to the
industrial revolution, the CO2-concen- The relevant authorities (or actors) in
tration in the terrestrial atmosphere was environmental policy are mainly the
slightly more than 280 parts per million public regional government authorities
by volume (ppmv). Since then, this (→EU, →Federal Republic, federal states,
value has been rising continuously. In municipalities) which are directly respon-
1958 it was 315 ppmv, and at present it sible for the adoption and implementa-
stands at some 370 ppmv. Extensive tion of environmental policy objectives
investigations by climatologists, partic- and measures, but also certain groups in
ularly by the Intergovernmental Panel the society who exert an indirect influ-
on Climate Change, point to the con- ence on environmental policy.
clusion that this increase, and the asso-
ciated rise of the earth’s average surface Federal Republic of Germany
temperature of between 0.4°C and Competences in the field of environ-
0.8°C, have been primarily caused by mental policy are defined in such a way
humans. that the Federal Republic is mainly
Simulations have shown that if the responsible for the adoption of the
present trend of fossil fuel use contin- appropriate laws (the legislative author-
ues (especially of hard and brown coal ity of the federal government). As a
and mineral oil), by 2100 CO2-emis- result, the legal framework that speci-
sions will have pushed up the atmos- fies maximum output values of pollu-
pheric concentration to over 700 ppmv, tants at the individual source in the
making a further increase of the earth’s form of concentration values has gener-
average surface temperature of between al validity. But the fact that the environ-
1.4°C and 5.8°C likely. This could have ment presents different problems and
serious implications for the global dis- conditions (regarding the difficulties
tribution of the vegetation zones, make associated with clean-up operations and
turbulent weather conditions more fre- existing environmental damage), is
quent, cause sea levels to rise and be usually not taken into account.
generally harmful for large geographic Administrative issues tend to be the
systems (by causing the gulf stream or responsibility of the German federal
North Atlantic currents to change states, from where some of the tasks are
course). again transferred to the district adminis-
trations (special administrative units of
REFERENCES: the states); the states have administrative
ENDRES, A. (2000), Umweltökonomie, 2nd or implementation authority. This
edition, Stuttgart; FEESS, E. (1998), means that environmental policy ad-
Umweltökonomie und Umweltpolitik, 2nd edi-
heres to competence allocation, as it is
tion Munich; SIEBERT, H. (ed) (1996),
customary in Germany on the basis of
Elemente einer rationalen Umweltpolitik.
Expertisen zur umweltpolitischen Neuorientie-
the Basic Law. However, the delimita-
rung, Tübingen. tion of environmental policy compe-
tences within the European Union (EU)
Paul Klemmer has been particularly problematical.
166 Environmental policy: Actors
Over the past years, the influence of lems, such as climate protection, have
the EU in environmental policy has special status where the individual
been growing all the time. Through nation states are the actors.
guidelines and regulations, the EU tries Within national borders it can usu-
to become involved in the environmen- ally be expected that besides politicians
tal policies of the different countries. A and the public institutions, business
well-known example is the new gener- representatives on the one hand, and
al guidelines for water management environmental activists on the other,
issued by the EU, which prescribe uni- are two important groupings which
form water management regulations. have a major impact on the determina-
But the regulations and guidelines tion of environmental policy objectives.
of the EU are frequently in conflict Both interest groups have different
with the subsidiarity principle in goals: while the business representa-
Germany, which prescribes that public tives are keen to set environmental pro-
tasks should be executed at the lowest tection standards at the lowest possible
possible level. Only if that level is not level in order to limit their costs and to
up to the task can it be transferred to the stay abreast of the international location
next higher level (→fiscal federalism). competition (→system competition), the
If an environmental problem is lim- environmental activists want to achieve
ited to a regional dimension because, the most far-reaching protection of the
for example, the environmental impact environment they can get.
is geographically limited, it should Important environmental associa-
preferably be dealt with at a regional or tions in Germany are the German Fed-
national level, as opposed to the eration for Environment and Nature
European level. Protection, the German Society for
Nature Conservation and Greenpeace.
The actors In recent years, however, the debate
The actors who exert their influence on around the definition of environmental
environmental policy decisions differ goals has become less heated than it
depending upon environmental sector used to be. From the point of view of
and the type of problem encountered. the →enterprise, there seems to be a
The actors in charge of waste disposal, growing understanding that environ-
for example, are not the same as those mental protection is an important
who are responsible for the classifica- image factor, while the environmental-
tion of a nature conservation area. The ists are increasingly prepared to take
general level of problem perception economic necessities into account.
among the public can mean that a spe-
cific issue may barely be paid any atten- REFERENCES:
tion at a specific point in time due to JÄNICKE, M. (1995), Akteure der

the fact that public awareness is low, Umweltpolitik, in: Junkernheinrich, M./
while at other times when the public is Klemmer, P./Wagner, G. R. (ed), Handbuch
zur Umweltökonomie, Berlin, pp. 11-15.
highly sensitised there will be active
involvement. Apart from that, interna-
Bernd Hansjürgens
tional and global environmental prob-
Environmental policy: Conflicting aims 167
Environmental policy: Conflicting Empirical investigations show that

aims the benefits of environmental protec-
tion measures clearly exceed their costs.
Like all the other useful profitable activ- This applies above all (but not only) to
ities, environmental protection meas- developing countries, where contami-
ures also require expense, i.e. resources nated drinking water and other envi-
have to be spent on them. This creates ronmental problems lead to disease and
competition with other potential uses, considerable losses of productivity.
for resources are always limited. One At the macroeconomic level, the
example of this is a revenue neutral question arises whether a relatively
ecological tax reform. strict environmental policy, as practised
Revenue neutrality means that in Germany, may lead to an internation-
→enterprises receive a rebate to balance al competitive disadvantage due to
their overall tax bill, for example, increased production costs. This con-
through a reduction of the costs of cern may be justified in specific indus-
fringe benefits. This does not, however, tries but, overall, it has neither been
mean that an ecological tax reform is theoretically nor empirically proven.
free – the enterprises concerned put On the contrary, investigations show
environmental protection measures in that the strict environmental policies in
place in order to decrease their tax bur- Germany led to a strong position on the
den, and these measures represent a world market in the field of environ-
consumption of resources: they cost mental protection technology, because
money. German enterprises invested promptly
An analogous situation can be in research and development and have
observed if the public sector imple- therefore become technology leaders
ments environmental protection meas- (→globalisation).
ures, although the same resources
could be spent on upgrading the health REFERENCES:
service or the education system. ENDRES, A. (1994), Umweltökonomie,

But environmental protection Darmstadt; FEESS, E. (1998), Umwel-
tökonomie und Umweltpolitik, 2nd edition,
measures not only cost money, they also
Munich.
create benefits. Some of these benefits
are of a purely financial nature, when Eberhard Feess
for instance building renovation costs
are saved, environmental disasters are
prevented or diseases due to environ-
mental factors decrease. There are also Environmental policy: Instruments
benefits which are more difficult to
measure: e.g. the benefit from the pre- Before becoming involved in environ-
vention of a disease includes not only mental policies and objectives, it is
the financial savings resulting from important to consider which instru-
hospitalisation becoming unnecessary, ments are likely to be useful. To the
but also in the simple fact that healthy question: Why should there be any-
people feel better than ill people. thing to consider?, the answer might
168 Environmental policy: Instruments
be: ‘If people don’t want a polluted dure. These and other disadvantages are
environment, then pollution must sim- comparable to someone demanding:
ply be outlawed!’ ‘Because food or computers are of great
However, bearing in mind the say- importance for the population, the gov-
ing that ‘everybody is a polluter’, and ernment ought to determine in what
adopting this rigid attitude would of numbers and quality they must be pro-
course mean that mankind, as a whole, duced.’ Such a claim would be followed
would have to be outlawed. by instant criticism, and rightly so.
In view of certain disadvantages of All aspects of the economy and the
this ‘solution’, a more moderate version environment throw up the question
of the above postulate might say: ‘It whether the state should issue detailed
must be made illegal to put more than a regulations or rely on personal initiative
certain amount of strain on the envi- and market forces. When it comes to
ronment.’ food and computers, society is over-
By and large, environmental poli- whelmingly in favour of market forces.
cies in Germany and elsewhere indeed The environment, though, is a com-
tend to stick to this simple and seem- pletely different issue. This is not easy
ingly reasonable approach. Industrial to understand, however, because the
installations which have an adverse quality of the environment is also an
impact on the environment are subject- important commodity in limited sup-
ed to regulations. Thanks to this envi- ply.
ronmental policy instrument, maxi- Despite the obvious differences
mum emission ratios can be specified between a computer and clean air, there
and the application of certain tech- is a whole catalogue of good ideas on
niques can be prescribed. In Germany, how to make market forces work for
this is based on the Federal Emission the supply of environmental goods.
Control Act, which contains the Emission certificates, emission charges
Technical Instructions on Air Quality and the environmental liability law are
Control, the Large Combustion Plant possible ways of doing this.
Ordinance, the Act on Water Resource Certificates enable companies to
Management and many other laws and trade the right to certain emission
regulations. The government has the quantities freely among themselves.
task of making sure that these laws and The environmental policy objective is
regulations are observed and that met because the number of emission
infringements are penalised. rights issued is limited to what is social-
This method does have serious ly tolerable. This is preferable to regula-
drawbacks, however. When a maxi- tions because businesses which can
mum emission value is stipulated, decrease their emissions cheaply, can
nobody thinks very hard about how a sell their rights to companies whose
lower value might be achieved. cost of preventing environmental dam-
Moreover, the techniques which are age is higher. This is extremely good
prescribed by the government may be news not only for industrialists but for
economically (and even ecologically) the national economy as a whole: after
less appropriate than another proce- all, environmental protection is more
successful and costs less when the asso- of free market instruments in environ-
ciated charges are intelligently distrib- mental policy is concerned, caution is
uted among companies with different recommended. Politicians are in the
cost structures than when rules and habit of labelling laws and other direc-
regulations are imposed. In the →EU, tives as market-friendly, when in actual
a system of ‘emission exchange’ came fact they are predominantly antagonis-
into force in January 2005. It is hoped tic to the market. The German Waste
that this will achieve the climatic policy Water Charges Act, for example, has
goals of the European Union as eco- been formulated in such a way that the
nomically as possible. This system environmental protection stimulus is
incorporates numerous elements of the almost entirely lost. The same criticism
concept behind the emission certifi- is levelled at the Law Concerning the
cates and puts them into practice. Liability Regarding the Environment.
Emission charges are equally prefer- Much, therefore, especially in the area
able to regulations. If a business has to of the environmental policy instru-
pay emission charges, it means that ments, remains to be done. There is
emissions have been given a price. It is still a long way to go before an ecologi-
true that the charges are not market- cally sensitive →market economy has
related prices but are dictated by the been perfected.
government, but still the desire for
profit stimulates entrepreneurial cre- REFERENCES:
ativity with the result that the costly BINDER, K. G. (1999), Grundzüge der
emission factor is rationalised away. Umweltökonomie, Munich; ENDRES, A.
(2000), Umweltökonomie, Stuttgart;
This brings a kind of business energy
ENDRES, A. (2000), Moderne Mikro-
into environmental protection, which
ökonomik, Munich.
one can only dream of when regulation
policies are used. Alfred Endres
Meanwhile, many industrialised
countries have adopted taxation systems
with ecological components. In a simi-
lar way, the liability law makes the Environmental protection
entrepreneurial self-interest serve envi- objectives
ronmental protection. The best way to
avoid being sued for damages is using The first, and to this day the most
good environmental protection tech- important, environmental policy objec-
nology. If the entrepreneur is insured, tive is the reduction of air, water and
the insurance company will diligently soil pollution (→environmental impact). It
monitor the state of the environmental has to be taken into account that envi-
technology used by the insured party. ronmental protection does not only
The Law Concerning the Liability bring benefits (e.g. in the form of clean
Regarding the Environment (Umwelt- air), but also costs (e.g. the costs of
haftungsgesetz) of 1991 puts certain installing filtering units). Thus the goal
aspects of this idea into practice. of environmental policy cannot be the
As far as the successful application total avoidance of any environmental
170 Environmental protection objectives
impact; this would be associated with tant economic task within the field of
extremely high costs and would there- environmental policy.
fore be uneconomical. During the past few years, and hav-
It is rather about weighing up the ing been extremely successful in bring-
benefits and costs of environmental ing down environmental pollution,
protection against each other, and mak- environmental policy has increasingly
ing the optimal quality of the environ- turned its attention to new tasks: apart
ment a reality. For example, the sulphur from improving the quality of the air,
dioxide levels in the air should not be water and soil, the more economical
brought down to zero, but only to the use of natural resources is next on the
point where the costs of the avoidance agenda. Here, a distinction is made
of an additional ton of sulphur dioxide between non-renewable resources
corresponds to the benefits which (such as oil and gas supplies) and
would result from this additional emis- renewable resources (such as animals
sion reduction. and plants). In this regard, the goal of
In reality, it is very difficult to make sustainable development plays an
environmental policies so optimal (or important role. This generally refers to
efficient). It is especially true that the an economic development, which gives
benefits of environmental protection equal consideration to the needs of the
cannot be accurately measured and present and of future generations.
translated into monetary units (some- Sustainability therefore requires
thing that is indispensable for the so- both a clean environment (or at least
called cost:benefit ratio). This is why one that is not too polluted) and the
environmental policy can usually only preservation of natural resources for
pursue the more modest goal of min- posterity. Environmental policy must
imising costs. This entails giving up the therefore guarantee that these resources
goal of an optimal-quality environment are handled responsibly and that the
in favour of a certain degree of environ- predatory exploitation of raw materials,
mental quality as a political require- the extermination of species and the
ment that has to be realised at mini- destruction of ecological systems are
mum cost. prevented (→resource protection).
In the case of the sulphur dioxide It is true that in Germany, environ-
emissions, the first step is for the gov- mental protection is highly regarded; it
ernment to set a maximum emission has been incorporated into the Basic
level (which will not be optimal), then Law (Article 20a) as a national objective.
it has to decide which instruments (e.g. But so far there is no environmental
regulations, charges or certificates) will policy that is truly focused on sustain-
bring about the necessary reduction of ability, that takes the connections
the sulphur dioxide emissions in the between the different environmental
most economical way. policy areas into account and that is
The selection of instruments based on concrete, verifiable objectives.
(→environmental policy: instruments), as Instead, nature conservation, soil,
opposed to the definition of the objec- water and climate protection, air pollu-
tives, has to be seen as the most impor- tion control and health protection are
being implemented more or less inde- only important to observe numerous

pendently of one another, and the for- environmental laws while maintaining
mulation of the objectives – with a few profitability, but that a way had to be
exceptions (such as the marginal emis- found for enterprises to marry environ-
sion limits for air pollutants in the mental protection with successful com-
Technical Instructions – Air) – remains pany management at their own initia-
vague (such as when the Federal Soil tive.
Protection Act calls for ‘the lasting pro- To this end, business science degree
tection of the functions of the soil’). courses soon introduced ‘environmen-
For as long as a concrete, logical tar- tal management’ as an additional aca-
get system is lacking in environmental demic subject. The core concept
policy, it will not be possible to imple- emerging from the research was that in
ment an environmental policy that is order to have the desired effect, envi-
both ecologically effective and econom- ronmental protection had to be inte-
ically efficient. grated with the other objectives,
processes and functions of business
REFERENCES: management.
BARTMANN, H. (1996), Umweltökonomie In a market economy, environmen-
– ökologische Ökonomie, Stuttgart, in particu- tal protection can never be the domi-
lar pp. 80-112; RAT VON SACHVER- nant goal of an enterprise. But an
STÄNDIGEN FÜR UMWELTFRAGEN
→enterprise can, for its own good, set
(2000), Umweltgutachten 2000, Berlin, 10.
itself economically acceptable environ-
März 2000; SÖLLNER, F. (2000),
Umweltökonomie und Umweltpolitik, in:
mental targets in order to increasingly
Festel, G./Söllner, F./Bamelis, P. (eds) lighten the ‘ecological footprints’ of its
(2000), Ökonomie und chemische Industrie – products and production processes.
eine praxisorientierte Einführung in die Volks- Economically, this will be driven by
wirtschaftslehre, Berlin, pp. 816-892. potential savings (savings on waste dis-
posal and energy) or ecological product
Fritz Söllner characteristics (for instance, food items
free of pesticide residues). Without
measurable targets, environmental pro-
Environment-oriented tection remains noncommittal as a
management management task (in keeping with the
old adage ‘what’s measured gets man-
Between the early and the mid-1980s, aged’; →business accountancy).
the business community – first in To reach their goals, enterprises (as
northern Europe and later in the always) need strategies, information,
United States and southern Europe – management systems and instruments.
began to recognise that environmental The strategy is often formulated as an
protection had become a strategic task ‘environmental strategy’ because, both
which involved far more than the internally and externally, this is easier to
installation of filtering equipment communicate. Apart from objectives,
downstream. The practical side of run- such a strategy requires planned meas-
ning a business showed that it was not ures (e.g. investments for the setting of
172 European Central Bank, German Federal Bank
environmental standards for industrial which serve to ensure that environ-

plants, product innovations) and the mental protection is managed as profes-
allocation of resources. sionally as other areas.
Although the concept of communi- Apart from the unpredictability of
cating the issue plays a role, the envi- economic trends and developments,
ronmental strategy – if it is to be really and the resulting short-term thinking
effective – has to be applied to the which predominates in business, the
‘ordinary’ business procedures (for hedonistic nature of modern consumer
example, the product development behaviour (i.e. pleasure-seeking and
process). Whether or not environmen- therefore often environmentally harm-
tal objectives can be achieved (e.g. the ful) and the strict, confusing and often
disposal costs, or the energy efficiency anti-progressive government regula-
of the product), depends on their inte- tions are the main reasons why business
gration in these processes. Therefore, is not more committed to environmen-
the environmental objectives have to be tal management.
broken down into these functions (i.e.
described in detail), so that they can be REFERENCES:
incorporated into the processes (e.g. the STEGER, U. (ed) (1997), Handbuch des inte-
objective ‘waste reduction from pro- grierten Umweltmanagements, Munich, Vienna.
duction process z by x%’ is written into
Ulrich Steger
the business plan in this concrete form
and is listed there together with the
necessary measures and resources).
This procedure is helped by shared European Central Bank, German
background information (environmen- Federal Bank
tal database) where the relevant emis-
sions and environmental effects are The banking and monetary policies are
captured, and which show where exact- vested in the central banks. They are at
ly the strategic priorities ought to be the top of the hierarchy of the banking
positioned. system and regulate the money supply
Environmental management sys- of their economies. For the first 50
tems (such as the ISO 14000 or the years of the existence of the Federal
European directive on voluntary partic- Republic of Germany, the German
ipation in the Environmental Manage- Federal Bank, with its headquarters in
ment and Auditing System, EMAS) Frankfurt, was responsible for the
help to define areas of responsibility German banking and monetary policy.
and describe informational and organi- In early 1999, the currency sovereignty
sational processes which are necessary if shifted to the European System of the
a responsible implementation of the Central Banks (ESCB). In the
agreed environmental protection objec- European Monetary Union (EMU),
tives and strategies is to be ensured. the national issuing banks of the mem-
To this end, special instruments ber countries became an integral part of
have been developed (e.g. environmen- the euro system, headed by the
tal controlling, the ecological balance) European Central Bank (ECB), like-
wise with its headquarters in Frankfurt and the deposit facility (the banks have
(→European monetary policy). surplus liquidity and can invest it at a
The prime objective of the ECB – as lower interest rate with the ECB). The
before that of the German Federal Bank interest rates for these two instruments
– is to ensure →price level stability in its form a passage within which the
currency area. By safeguarding pur- overnight rates for day-to-day money
chasing power, the ECB makes its con- fluctuate.
tribution to a lasting and satisfactory The minimum reserve serves as a
economic growth as well as a high level buffer for the daily fluctuations which
of employment. In the long run, com- the business banks have to keep at the
petition can function only if price levels ECB and which they have to attain as a
remain stable. Inflation and deflation monthly average. The minimum
are equally responsible for distortions reserve is calculated as a certain portion
in the production, consumption and of the short-term client deposits with
distribution of the economic product banks, and can be varied by the ECB in
and are thus detrimental to prosperity order to achieve monetary policy goals.
(→conflicting aims in economic policy). The decisions on the deployment of
In order to achieve its ultimate the monetary political instruments are
objective of price stability, the ECB has made centrally by the ECB Governing
monetary policy instruments at its dis- Council and they are implemented in a
posal (→European monetary policy: instru- decentralised manner by the participat-
ments). These were developed in line ing national central banks. The ECB
with the practical monetary policy Governing Council is made up of the
experience of the issuing banks in the six members of the board of directors of
euro system. Market-orientated instru- the ECB and of the presidents of the
ments are paramount, since they are national central banks of the euro area.
mostly in harmony with the existing In order to avoid conflicting aims,
competition system in the world of particularly between the governments
finance. Through so-called main refi- and the ECB, whose primary commit-
nancing business, the banks can once a ment is price level stability, the ECB
week, and for a period of one week, get Governing Council is independent in
the liquid funds they need (central bank its resolutions. Its members are not
money) by approaching the ECB with authorised either to ask for, or to accept,
bids. Besides, the ECB – also through instructions from a third party.
bidding – offers long-term refinancing Furthermore, all political institutions
for three months. are obliged not to exert pressure on the
For special, short-term liquidity ECB (Article 108, ECC). As an addi-
requirements or for the investment of tional protection against political lobby-
surplus liquidity, the business banks can ing, the ECB and the national issuing
fall back on two permanent facilities: banks are not allowed to grant credits to
the marginal lending facility (the banks EU institutions or to national govern-
need liquidity and can obtain it from ments.
the ECB at a higher interest rate than Tasks, objectives, instruments and
through the main refinancing business) competences of the ESCB correspond –
174 European Economic and Monetary Union
as at the Federal Bank before – to the second option, which has more pro-
requirements of a →social market econo- found political and psychological con-
my. The priority of the monetary policy sequences, and represents a more defin-
demanded by Walter →Eucken is guar- itive form of integration. In both forms
anteed through the creation of an effi- of monetary union, national finance
cient institutional framework. policies have to be replaced by a cen-
tralised finance policy.
REFERENCES: In the case of the EMU a European
EUROPÄISCHE ZENTRALBANK Central Bank (ECB) was established
(2000), Die Einheitliche Geldpolitik in Stufe 3 – with the →German Federal Bank being
Allgemeine Regelungen für die geldpolitischen
just one of the national central banks
Instrumente und Verfahren des eurosystems,
with voting rights. Beyond this, the
Frankfurt/M. (www.ecb.int); ISSING,
O./GASPAR, V./ANGELONI, I./TRIS-
German government has given up its
TANI, O. (2001), Monetary Policy into the right to alter the exchange rate for good.
Euro Area – Strategy and Decision Making at the The euro exchange rate is determined
European Central Bank, Cambridge; ISSING, by a European Community policy
O. (1996), Einführung in die Geldpolitik, 6th committee.
revised edition, Munich. It has become customary to refer to
the European Economic and Monetary
Reiner König Union (EEMU) as something akin to
Siamese twins. This is not the case –
widely differing sectors of the economy
European Economic and are regulated without a mutual causal
Monetary Union relationship. While an economic union
without a monetary union is quite fea-
The European Monetary Union sible, a monetary union without an eco-
(EMU) has been in existence since 1 nomic union will never work. This
January 1999. The issuing of coins and means that the economic union should
banknotes on 1 January 2002 concluded come first and the monetary union sec-
a process of integration which had ond.
become official policy as long ago as An economic union has been
December 1969 (→integration). achieved when conditions between the
In terms of integration, a monetary member countries in the integrated area
union is a considerably more far-reach- resemble those of a domestic market.
ing objective than a free trade zone or a This means that of the five constitu-
customs union, affecting as it does the tional liberties of an economic and
very core of the financial and monetary monetary union, four have to be grant-
sovereignty of the nations concerned. ed by the framework of the economic
A monetary union can take either of union and one by the framework of the
two forms: either it will have irre- monetary union.
versibly fixed exchange rates between Economic union freedoms are free-
the participating countries or it will dom of trade, freedom of the service
adopt a uniform currency. The industry, free movement of labour and
European Union (EU) decided on the the freedom to establish companies.
The monetary union freedom is free- Earlier attempts to establish an

dom of financial and monetary transac- EMU failed because the economic,
tions. monetary and political consequences of
In the areas of the national this process of integration had not
economies to be liberalised, the follow- found acceptance. In addition, there
ing integration requirements have to be were insurmountable differences con-
fulfilled: cerning the details of financial and
monetary policy: monetary stability as
• The creation of a domestic market for (sole) objective; (in-)dependence for a
goods and services. European central bank; convertibility at
the beginning/the end? This is why the
• Companies’ choice of locality. Den Haag initiative ended in failure
(1–2 December 1969) as long ago as
• A flexible labour market. 1971–1972 (Willgerodt et al., 1972).
The introduction of the European
• Ability to adapt to the growing com- Monetary System (EMS) in March
petition in the abovementioned mar- 1979 did not target the European eco-
kets. nomic union directly, but it still failed
to pave the way for progression from
On the monetary side, a communi- the first to the second institutional level
ty financial market has to be created of integration. The successes of the
that allows for the easy conversion of EMS were due to a reversal of the rules
the common currency into other cur- and to the positive anchoring role of the
rencies. Deutschmark and the German Federal
A common financial and monetary Bank.
policy demands the coordination of the The third attempt, officially initiat-
economic policies of the member ed in 1988, led to the government con-
countries, assuming that they – as regu- ferences about the European Monetary
lated in the EU contract – essentially Union and the political union. They
remain under national determination were brought to a conclusion at
and are regarded ‘as an issue of com- Maastricht in December 1991, resulting
mon interest’. Otherwise, financial and in far-reaching amendments to the
monetary policy is disrupted or impos- European Community contract and in
sible (see figure, next page). the creation of the European Union
These requirements of an EMU Treaty. The monetary union and its
demonstrate the depth of integration policies were ratified and implemented
aimed at as well as the considerable there and then.
political consequences to which an Why was it that this most recent
EMU gives rise. This fact justifies the attempt ended in the successful
question whether a political union (pre- creation of the EU?
viously established or created simulta-
neously with the EMU) is necessary in • The most important – and frequently
order to invest the EMU with lasting omitted – prerequisite for the exis-
stability. tence of an economic union was
176 European Economic and Monetary Union
European Economic and Monetary Union (EEMU)

Sub-sector: European Monetary Union
Markets Politics
common Convergence of monetary policy
Financial markets Currency market Decentralised Centralised
Functioning – Common – coordination Common

– Money markets exchange rate of the money administration of:
– Capital markets system and – the currency
– Market – Common exchange – the monetary
competition exchange rate rate policy policy (status of
policy the European
– Free payment Central Bank)
transactions and – the exchange
circulation of rate system
capital for all – exchange rate
(convertibility) policy
European Economic and Monetary Union (EEMU)

Sub-sector: European Economic Union
Markets Politics
Common domestic market Convergence of economic policy
Goods and Labour Centralised

services market market
Political union with leg-
– Free exchange – Freedom of islative powers over insti-
of goods and movement tutional framework and
service for workers process policy (economic Decentralised
– right of domicile – Flexibility of constitution of the Union)
– common compe- national
tition policy and labour
control of gov- markets Legally binding, par- Coordination of
ernment subsi- tially common admin- the economic and
dies istration of economic labour market poli-
policy and effective cies = de facto
regulatory policy for partially common
the labour markets administration due
through agreements/ to criteria and pro-
contracts (e.g. stabili- cedures focused
ty and growth pact on convergence
already in place, having been started which is binding for all members and
and made a reality in 1987 with the also for the monetary union.
programme Domestic Market ’92.
• The economic orientation was clari-
• The German →reunification, coupled fied as well. As a result, price stability
with the determination of the federal remains a priority, but not only
government to demonstrate its loyal- regarding financial policy. It is equal-
ty to the West, led to the offer to ly relevant for exchange rate policy
relinquish the anchor currency and economic policy. The Maastricht
Deutschmark in the context of an accord emphasises repeatedly that
EEMU in favour of a common cur- economic policy has to be in harmo-
rency. This suited other EC states and ny ‘with the principle of an open
their political ambitions. Among →market economy with free →competi-
other reasons, they aspired to an tion’ (Articles 4, 98, 105).
EEMU as a way of ending the domi-
nance of both the Deutschmark and What is still lacking? Many details have
the German Federal Bank. been found wanting, but specifically
two areas (might) cause problems:
• The process of integration started on
1 July 1990 with the transition to cur- • Attempts to make definitive progress
rency convertibility. on the road towards a political union
failed, not only in Maastricht but at
• The ECB was solely responsible for the government conferences at
the codification of the creation and Amsterdam (1997) and Nice (2000).
maintenance of price stability and The next government conference on
succeeded in doing so. Furthermore, the political union has already been
the ECB and all national central planned but the massive EU enlarge-
banks became independent and ment has increased, rather than
therefore no longer subject to decreased, the problems.
instructions from political institu-
tions (→European monetary policy). • The conceptualisation of the eco-
nomic union was too narrow from
• The coordination of the economies the start. Politically, the economic
was greatly improved. In order to interdependence between the com-
qualify for the monetary union, each mercial sector (trade and service
country has to fulfil criteria of con- industry, freedom to establish a busi-
vergence (stable prices, stable ness) and the labour market was
exchange rates, stable interest rates, overlooked. The national labour
solidity of public finances – budget markets were not included in the
deficit, indebtedness). Particularly reorganisation and integration of the
sensitive and politically important market economy and might turn into
criteria related to public finance were a stumbling block.
clarified and tightened in a growth
and stability agreement in 1997, There are many reasons for the
178 European monetary policy: Actors
sceptical attitude towards the EEMU – European System of Central Banks

some justified and others imaginary. (ESCB), which includes the national
There is consensus that this is a politi- central banks of those EU member
cal undertaking which will require states that have not yet adopted the euro.
enormous political courage and the will The eurosystem is managed by the
to adjust, if besides the economic objec- ECB Governing Council and the ECB
tives the political aim – the stabilisation Executive Board. The ECB Governing
of the European peacetime order – is to Council comprises the members of the
be achieved. Executive Board and the presidents of
all the NCBs which belong to the
REFERENCES: eurosystem. It determines the Com-
WILLGERODT, H./DOMSCH, A./ munity monetary policy according to
HASSE, R. H./MERX, V. in collaboration Article 12 of the ESCB Statutes, includ-
with KELLENBENZ, P. (1972), Wege und
ing decisions relating to intermediate
Irrwege zur Europäischen Währungsunion,
objectives, key interest rates, and central
Freiburg i.B.; UNGERER, H. (1997), A
Concise History of European Monetary
bank money supply. The ECB Gover-
Integration. I, Westport-London; BRUSSELS ning Council takes decisions based on
INITIATIVE (1998), Convergence-Coherence- majority vote; the president’s vote
Adjustment. The need for the convergence in the decides in the case of a tie.
area of economic policy coherence in terms of men- The Executive Board comprises the
talities of EU member states with a view to future president and vice-president of the
co-operation and adjustment in the EMU, ECB and four other members appoint-
Brussels. The Brussels Initiative is a group ed after hearings of the ECB Governing
of European economics scholars who Council and European Parliament by
analyse and report on economic and curren- state leaders of the member states that
cy policy. Available at Konrad Adenauer
have adopted the euro. The Executive
Foundation, Ave. De l’Yser 11, B-1040
Board implements the decisions of the
Brussels.
Governing Council, and it gives the
Rolf H. Hasse necessary instructions to the NCBs.
The ESCB is governed by the ECB
Governing Council, the Executive
Board and the General Council
European monetary policy: (extended Governing Council), which
Actors comprises the president and vice-presi-
dent of the ECB as well as the
The eurosystem is responsible for mon- presidents of the NCBs of all the EU
etary policy in the member states of the member states. The General Council
European Union (EU) that have intro- coordinates the monetary policy of the
duced the euro. It comprises the eurosystem with the NCBs of the
European Central Bank (ECB) in member states that have not yet adopt-
Frankfurt and the national central banks ed the euro.
(NCBs) of the EU member states that Article 7 of the ESCB statute
have adopted the euro as a common guarantees the independence of the
currency. The eurosystem is part of the decision-making bodies. Thus ‘when
European monetary policy: Aims and duties 179
exercising the powers and carrying out REFERENCES:
the tasks and duties conferred upon DIETRICH, D./ VOLLMER, U. (1999),
them … neither the ECB, nor a nation- Das geldpolitische Instrumentarium des
Europäischen Zentralbanksystems, in:
al central bank, nor any member of
Wirtschaftswissenschaftliches Studium (WiSt),
their decision-making bodies shall seek
11, pp. 595-598; GÖRGENS, E./ RUCK-
or take instructions from Community RIEGEL, K./ SEITZ, F. (2001), Europäische
institutions or bodies, from any govern- Geldpolitik: Theorie, Empirie, Praxis, 2nd
ment of a member state or from any completely revised edition, Düsseldorf;
other body’. EUROPEAN CENTRAL BANK (2001),
In particular, this independence The Monetary Policy of the ECB, Frankfurt/ M.
refers to the pursuit of monetary policy
objectives and the decision-making Diemo Dietrich
regarding economic →...strategies as well
as the implementation of economic
→...instruments and personal independ- European monetary policy:
ence. Aims and duties
The last point is to be guaranteed
through long terms of office for the According to Article 2 of the European
governors (eight years) and the presi- System of Central Banks (ESCB)
dents of the NCBs (minimum five statutes (→…actors), the prime objective
years). In addition, members of the of the euro system is ‘price stability pro-
Executive Board cannot be re-appoint- tection’. This is to assist the euro system
ed. With the desire for an independent in ensuring the stability of the purchas-
monetary policy, the indications from ing power of the common currency and
research that the objective of →price sta- to prevent inflation.
bility is more likely to be achieved The European Central Bank (ECB)
through an independent monetary pol- considers this objective as met as long
icy can also be respected. as the average annual increase of con-
In order to guarantee price stability, sumer prices does not exceed the value
eurosystem policy aims to regulate the of 2% in the medium term. The reason
available liquidity of all the monetary behind this projection is the stabilisa-
financial institutions in the euro area; tion of the expectations of households
consequently the other monetary finan- and →businesses. However, the ECB
cial institutions are considered, in the does not feel obliged to correct imme-
broad sense, to be economic players. In diately short-term deviations from this
particular, this includes local financial objective.
institutions. Article 2 of the ESCB statutes con-
These are enterprises whose activi- tinues: ‘Insofar as this is possible with-
ties involve accepting funds or other out restricting the objective of price sta-
repayable moneys as well as administer- bility, the ESCB supports the general
ing loans, for example banks. economic policy in the Community, in
order to contribute to the realisation of
the … jointly agreed objectives of the
Community.’
180 European monetary policy: Instruments
Among these are balanced econom- Besides the formulation and imple-
ic development as well as a high level of mentation of monetary policy in the
employment. However, science and the Community, according to Article 3 of
ECB agree that in the medium and long the ESCB statutes, foreign currency
term these complementary objectives transactions, the administration of the
are best met through price stability pro- official currency reserves of the mem-
tection (→price level stability). This ber states and the promotion of a
improves the pricing system trans- smoothly operating money market
parency on the one hand, and thus the count among the euro system’s respon-
efficiency of the distribution of sibilities. Moreover, the ECB, accord-
resources to the place of highest return ing to Article 4 of the ESCB statutes,
in each case (efficiency of allocation). also occupies an advisory function and
Small inflation risks lead to a lowering has to be consulted on all legislative
of the interest levels in the long term proposals of the Community. It is enti-
and have a stimulating effect on invest- tled to voice its opinion in disputes with
ment and →employment. Furthermore, organs and institutions of the Com-
price stability means that household munity as well as national authorities,
and company assets are not deployed as whenever its area of responsibility is
a hedge against inflation, but are involved.
utilised productively. Finally, it also pre-
vents an arbitrary redistribution of REFERENCES:
assets and →income, strengthening the DIETRICH, D./VOLLMER, U. (1999),

Community’s internal social cohesion. Das geldpolitische Instrumentarium des
Europäischen Zentralbanksystems in:
Thus, the price stability objective is
considered as being compatible with
11, pp. 595-598; GÖRGENS, E./RUCK-
economic stability and a boost to the RIEGEL, K./SETZ, F. (2001), Europäische
labour market. The ECB considers it Geldpolitik: Theorie, Empirie, Praxis, 2nd
pointless to attempt to lower →unem- revised edition , Düsseldorf; EUROPEAN
ployment in the short term by means of CENTRAL BANK (2001), The Monetary
financial policies that go against the Policy of the ECB, Frankfurt/M.
price stability objective, since such poli-
cies endanger the conditions for stable Diemo Dietrich
economic and employment growth, at
least in the medium term (→conflicting
aims in economic policy). The prospects of European monetary policy:
lowering unemployment and of stabil- Instruments
ising the →economy through monetary
policies are very limited, even in the According to Articles 18 and 19 of the
short term, since the monitoring of European System of Central Banks
business cycles is never absolutely cor- (ESCB) statutes, the instruments at the
rect and is always subject to a time lag, disposal of the ESCB (→European mon-
and since financial policy does not have etary policy: actors) consist of open market
a perfectly predictable delayed effect on operations, standing facilities and mini-
employment and the economy. mum reserves. The principal instru-
European monetary policy: Instruments 181
ment comprises the following four In addition, the euro system carries
open market operations through which out foreign currency swap operations,
the euro system grants loans to financial where euros are bought (or sold) in
institutions: by means of its main refi- exchange for a foreign currency, under
nancing operations, the euro system the concurrent agreement to sell (or
covers the bulk of the financial sector’s buy) euros at a later, fixed point in time,
liquidity requirements; at the same in exchange for foreign currency. In
time its terms (interest rate, quantity of order to absorb market liquidity, the
allocation) are meant to signal the euro system is able to issue its own
course that monetary policy is intended debenture bonds as well as to accept
to take. fixed-term interest-bearing deposits
Longer-term refinancing operations from financial institutions.
ensure the provision of long-term All open market operations with
liquidity without a signal effect; fine- financial institutions are executed in the
tuning operations are used by the euro form of bidding processes (tenders),
system to balance unexpected liquidity either as fixed-rate tenders or as vari-
fluctuations and to stabilise interest able-rate tenders.
rates, while liquidity distribution with- For fixed-rate tenders, the financial
in the financial sector is regulated by institutions have to indicate the amount
structural operations. of Central Bank money they require in
In order to ensure the liquidity of the form of a bid, which has to be sub-
the financial sector through open mar- mitted at the interest rate set by the
ket operations, the euro system and the euro system. If the sum of all the bids
financial institutions usually arrange submitted by the financial institutions
restricted transactions such as repur- exceeds the amount of Central Bank
chase operations or pledged securities money the euro system is prepared to
operations. For repurchase operations, lend, the final allocation to the financial
the euro system will buy securities from institutions will be based on a quota
financial institutions while at the same system. If, for example, all the bids
time concluding a repurchasing agree- received add up to s800 billion and the
ment with them, obliging the financial euro system does not wish to lend more
institutions to repurchase the securities than s80 billion, each financial institu-
at a later time and to refund the Central tion will receive one-tenth of its origi-
Bank money. nal bid.
Where pledged securities operations For variable-rate tenders, however,
are concerned, the euro system will the financial institutions are not only
lend against securities owned by finan- obliged to indicate the size of their bids,
cial institutions without any property but also the level of interest at which
transfer taking place. The euro system they are prepared to maintain them.
also concludes definitive transactions, The final allocation then depends on
where securities are bought or sold out- the interest rates submitted together
right and where time limits do not with the bids. If, for example, the allo-
apply (outright open market opera- cated amount is once again s80 billion,
tions). and Bank A has submitted a bid of s30
182 European monetary policy: Strategies
billion at 5%, Bank B a bid of s50 bil- such as deposits, debentures and issued
lion at 4% and Bank C a bid of s40 bil- money market papers, with the excep-
lion at 3%, Bank A receives s30 billion tion of liabilities towards other financial
in Central Bank money and Bank B institutions bound by the minimum
s50 billion – their bids being the high- reserve legislation.
est – while Bank C receives nothing.
When the allocation is made at a REFERENCES:
uniform interest rate, it is referred to as DIETRICH, D. /VOLLMER, U. (1999),

the Dutch system; if, however, financial Das geldpolitische Instrumentarium des
Europäischen Zentralbanksystems, in:
institutions receive Central Bank
money at their own, individually sub-
11, pp. 595-598; GÖRGENS, E./RUCK-
mitted interest rates, the allocation is RIEGEL, K./SEITZ, F. (2001), Europäische
made according to the American sys- Geldpolitik: Theorie, Empirie, Praxis, 2nd
tem. completely revised edition, Düsseldorf;
Besides open market operations, the EUROPEAN CENTRAL BANK (2001),
euro system also offers so-called stand- The Monetary Policy of the ECB, Frankfurt/
ing facilities which financial institutions Main.
can use if they wish. These provide
extremely short-term liquidity as well Diemo Dietrich
as liquidity absorption. This liquidity is
offered by a marginal lending facility,
which gives financial institutions access European monetary policy:
to unrestricted amounts of Central Strategies
Bank money at a fixed euro system
interest rate for the coverage of short- A monetary policy strategy describes
term liquidity requirements. Liquidity the long-term decision-making process
absorption is provided by a deposit regarding the deployment of monetary
facility, which allows financial institu- policy →…instruments aimed at the
tions to invest surplus liquidity with the achievement of monetary policy objec-
national central banks at a prescribed tives.
euro system interest rate. In this respect, the monetary policy
In conclusion, the euro system has a strategy has to fulfil two principal tasks:
minimum reserve instrument which
compels the financial institutions locat- • Lending structure to the decision-
ed in the euro currency area to deposit making process on monetary policy
interest-paying minimum reserves to and providing the ECB Governing
the amount of (currently) 2% of their Council (→…actors) with the infor-
liabilities, with the national central mation it requires for this decision-
banks. This instrument is intended to making process.
aid the stabilisation of Central Bank
interest rates as well as to increase the • Strategy that serves as a means of
demand for Central Bank money. The communication and contact with the
minimum reserve requirement applies public and thus renders financial pol-
for the financial institutions’ liabilities icy more plausible.
Through its monetary policy, the this reason, the European Central Bank
euro system is pursuing a stability-ori- (ECB) has declared its intention to
ented strategy which is, above all, sup- steer the intermediary objective of
posed to fulfil various criteria. The money supply in such a way that the
main criterion is effectiveness, meaning ultimate objective, which in financial
that only the strategy will be applied terms is ‘price level stability’ (→…aims
that is best able to achieve the objective and duties), is most easily reached.
of monetary policy. To this end, the ECB chose as inter-
At the same time, the strategy is mediary objective and as its parameter, a
supposed to signal to the public a realis- comparatively loosely defined money
tic commitment to this objective. This supply comprising not only the circula-
requires clear and comprehensible tion of cash and the usual deposits in
wording as well as transparency and financial institutions, but also money
easy accessibility for the public; more- market bonds and bonds issued by
over, the public must be given the other monetary financial institutions
opportunity to evaluate the implemen- (referred to as money supply M3). The
tation of monetary policy as well as its ECB’s justification for choosing money
positive outcomes, by measuring them supply as its intermediary objective is its
against the monetary policy objective. suitability as an indicator of future price
Essentially, the euro system’s stabil- trends and the fact that it is easily con-
ity-oriented strategy consists of two ele- trollable through the euro system.
ments. The first is the quantitative
determination of the principal objective REFERENCES:
of →price level stability by means of the DIETRICH, D./VOLLMER, U. (1999),

projection of an inflation target of 2%. Das geldpolitische Instrumentarium des
Europäischen Zentralbanksystems in:
The other element consists of the two-
Wirtschaftswissenschaftliches Studium (WiSt), 11,
pronged support for the strategy.
pp. 595-598; GÖRGENS, E./RUCK-
The first pillar comprises an eco- RIEGEL, K./SETZ, F. (2001), Europäische
nomic analysis of the recent economic Geldpolitik: Theorie, Empirie, Praxis, 2nd com-
development and its short- and medi- pletely revised, Düsseldorf; EUROPEAN
um-term risks for price level stability. CENTRAL BANK (2001), The Monetary
The second pillar is the monetary Policy of the ECB, Frankfurt/M.
analysis as a basis for the prognosis of
the medium- and long-term inflation- Diemo Dietrich
ary trend. Scientifically, this is based on
the view that inflation is a monetary
phenomenon which results from an EU: Agricultural policy and
excessive money supply increase rela- enlargement east
tive to the actual economic →growth.
By using the monetary analysis the Although in many countries →agricul-
ECB tries to check the short- and medi- tural policy is considered to be a sensitive
um-term inflation prognosis resulting domestic affair, the member countries
from the economic analysis, taking into of the then newly founded European
account a longer-term perspective. For Economic Community decided at the
184 EU: Agricultural policy and enlargement east
very outset of European →integration to many cases had to be put into tempo-
give up their national agricultural poli- rary government storage, was not possi-
cies and replace them with a common ble without high →subsidies, since prices
agricultural policy that included a union the international market were
form agricultural commodities market. markedly lower than the prices fixed by
This was not an obvious develop- the EU agricultural policy. Therefore,
ment by any means, as the individual more and more government money
member countries ran their previous had to be spent on the removal of the
national agricultural policies along increasing surplus of the agricultural
quite different lines. However, free commodities markets in the EU.
agricultural trade between the member By around 1980, the result was that
states in the context of a common poli- about three-quarters of the entire EU
cy was an important goal – especially for budget had to be spent on the common
France, since that country hoped that agricultural policy and the EU was in a
this would compensate for the opening serious financial crisis. At the same
of the French market to the import of time, increasingly harsh commercial
industrial goods from Germany. conflicts arose between the EU and
During the establishment of the other countries (particularly the United
common agricultural policy after 1960, States), which felt that their agricultur-
common agricultural price levels had to al export interests were adversely affect-
be agreed between countries with pre- ed by the EU’s market interference.
viously low agricultural prices such as To prevent these unfavourable con-
France, and high agricultural prices sequences of the common agricultural
such as Germany. After harsh argu- policy, however, initially the symptoms
ments, the decision – particularly due to and not the causes were addressed. In
pressure from Germany – was made in 1984 – because of a sharp increase of the
favour of a relatively high price level for budget expenditure, especially in the
agricultural products. As if that were dairy market – quotas (quantitative
not enough, in the years to come prices restrictions) for milk production were
for agricultural products in the introduced, which prescribed to indi-
European Union (EU) continued to be vidual farmers how much milk they
increased. They thereby departed more were allowed to sell. In an attempt to
and more from the level that would deal with the surplus problem on the
have prevailed in markets with no gov- EU grain market, it was decided to take
ernment interference. agricultural land out of the cultivation
As a consequence, agricultural pro- process. It was hoped that it would be
duction in the EU rose far beyond the possible with measures of this kind to
growing demand. This meant that the keep the expenditure of the common
EU, which at the time of the establish- agricultural policy below an upper limit
ment of the common agricultural which had been fixed in 1988.
policy was still importing agricultural But reforms targeting the roots of
products, started to export all major the problem in the form of hyper-
agricultural products. However, the inflated prices for agricultural products
export of the growing surplus, which in only followed in 1992, after it had
become clear during the Uruguay regarding the agricultural commodities

Round of the General Agreement on markets, particularly in connection
Tariffs and Trade negotiations that the with the Eastern enlargement, meant
talks could not be concluded until the that further reforms would be neces-
EU had offered to come to an accept- sary. They were required to be under-
able compromise with its negotiating taken in the context of a ‘half-time eval-
partners on agricultural issues. uation’ scheduled for 2002–2003.
Under EU agricultural commis- Commissioner Fischler obviously
sioner MacSharry, support prices for wished to use that opportunity to
grain and beef were brought down sub- advance the EU agricultural policy
stantially. To compensate for the reforms further (→EU: budgeting).
income losses of farmers, direct grants The most difficult agricultural poli-
out of the EU budget were introduced. cy problem one is going to encounter in
With the Agenda 2000 resolutions, connection with the enlargement east
these reforms were taken several steps has definitely not begun to be solved by
further under agricultural commission- Agenda 2000: whether farmers in the
er Fischler in 1999, when the beef and member states should also receive the
grain prices were lowered once more direct grants which were introduced in
and dairy price reductions were the EU in 1992, remains uncertain. So
planned – in each case with more direct far the EU has been of the view that this
grants for farmers (albeit not making up is neither required nor does it make
fully for their losses of income). sense, since these grants were intro-
Through these reforms, the EU has duced by the original EU in order to
managed to reduce its price support for counterbalance price reductions which
grain to such an extent that it might be do not occur in the new member states.
able to export grain without subsidies in The governments of the new mem-
the future. ber states nevertheless stubbornly insist
Like the total package of Agenda that their farmers should also receive
2000, these further reforms of the EU these grants, and they are able to sup-
agricultural policy helped prepare the port their demands with a number of
EU for the Eastern enlargement (→EU: arguments which are hard to reject.
enlargement). This seemed necessary The most plausible of these is the argu-
because the new Central European ment that →competition between the
member countries had a considerable farmers of the original EU and those in
agricultural production potential and the new member states would be
were thus liable to contribute to a pre- severely distorted if the new member
carious aggravation of the surplus prob- states were denied the grants.
lems in EU agricultural commodities A crucial task for the EU agricultur-
markets and thus to a heavy burden on al policy is therefore – specifically, but
the EU budget. not only in connection with the
In this regard, the agricultural enlargement east – a decision about the
reforms of Agenda 2000 might have future of the direct grants.
been quite effective; although a com- Meanwhile, the direct grants have
prehensive solution to the problems become the key element of the EU
186 EU: Budgeting
agricultural policy and already make up sation. Active financial equalisation

half of all the expenditure for this poli- entails the assignment of public rev-
cy, with a rising trend. How the grants enue. Passive financial equalisation, by
will be allocated in future is still contrast, is defined as the assigning and
unclear. It is, however, likely that the distribution of public responsibilities as
grants will become increasingly less well as the manner of their execution.
dependent on production but will be Since political responsibilities are
more in tune with actual market condi- always connected with expenditure,
tions, that they will be gradually both terms (responsibilities, expendi-
reduced as time goes on, and that even- ture) can be used equally. The relation-
tually completely different incentives ship between own revenue and expen-
will take their place. These are sup- diture, which can be independently
posed to reward the sort of social determined, reflects the degree of
achievements that agriculture provides, financial autonomy of a social organisa-
especially for the environment and tion. For the European Union (EU),
regional development. the allocation of responsibilities and
financial means to union level always
REFERENCES: simultaneously represents a piece of
HENRICHSMEYER, W. /WITZKE, H. P. political integration.
(1991), Agrarpolitik. Vol. 1 Agrarökonomische The original integration of sectors
Grundlagen, Stuttgart; HENRICHSMEY-
of the economy was – thanks to the
ER, W. /WITZKE, H. P. (1994), Agrarpolitik
removal of barriers to trade – followed
Vol. 2, Bewertung und Willensbildung,
Stuttgart.
by the gradual shift of individual mem-
ber states’ policies to the level of the
Stefan Tangermann EU. This means that passive financial
equalisation continued to grow (Article
3 ECC). This includes the right to take
decisions on the way in which the
EU: Budgeting assigned responsibilities are imple-
mented (decision competence), the way
A ‘financial constitution’ comprises all in which tasks are carried out (executive
legal regulations which define the com- competence) and how money is spent
petence of public authorities to handle for this (financing competence).
income and expenditure. The ‘financial In the event of the expenditure
constitution’ of the EU consists of reg- increasing, the revenue has to grow too.
ulations for the acquisition of financial This entails an expansion of the active
means and instructions on how and in financial equalisation. This part of the
which political spheres these should financial constitution requires clarifica-
and/or can be used. tion as to the sources of revenue (deci-
sion competence), the right to impose
EU income and expenditure revenue (tax setting competence) and
responsibilities the right to dispose of the proceeds
A financial constitution can be divided gained (competence to use proceeds).
into active and passive financial equali- Articles 268-280 of the European
EU: Budgeting 187
Community Treaty can be interpreted When the EU expenditure is inter-

as the financial constitution in the nar- preted as an offer of public goods by the
rower sense. The EC merger treaty of EU, another picture emerges. In that
1965 meant that the administrative case, policy spheres and categories of
budgets which had originally been expenditure at Community level are
drawn up separately for the individual one and the same. This is reflected in
sections of the European communities the budgets. The most important items
were replaced by a uniform budget. In are CAP expenditure and the costs of
1970, the research and investment the structural and coherence policies. In
budget of Euratom was included in the the course of the Eastern enlargement,
general budget. Today, there is an EU financial aid in the context of the inte-
budget, a European Community for gration strategy for the membership
Coal and Steel (ECCS) operational candidates must be added to the
budget, the European Development account.
Fund and the plan regarding EU bor- Moreover, the EU allocates funds to
rowing and lending, which comprises the internal (cooperation in the spheres
the European Investment Bank as well of the judiciary and domestic affairs) as
as the New Community Instrument. well as external (joint foreign and secu-
In terms of expenditure, a distinc- rity policies) policy fields. Besides the
tion has to be made between mandato- administrative costs, a mere 5.1% of the
ry and non-mandatory expenditure. total expenditure has to be covered.
Mandatory expenditure arises from Until 1971, the revenue of the
obligations of the EU Treaty, from European Community (EEC/EC) was
derived rights, from agreements and made up of financial contributions
understandings, as well as from interna- from the member countries which
tional treaties and contracts based on were tied to a specific purpose, as well
civil law. The European Council as the as revenue distributions on the produc-
highest organ of the EU is responsible tion of coal and steel.
for their implementation. On the basis of Article 201 of the
Regarding non-mandatory expendi- EEC contract, in 1970, the communi-
ture, the European Parliament has the ties were granted competence for their
decision-making power. The EU own resources and, by 1975 the financ-
Commission is authorised to allocate ing system had gradually been changed
these means to individual projects in over to these sources. Since that time,
the spheres of structural policy, research the key concept has been ‘own
and technology as well as developmen- resources’.
tal aid. In connection with the lack of The means consist of fiscal revenue
democracy within the EU which has at the disposal of the Community for
been discussed, the allocation of expen- the purpose of covering costs. The total
diture for the common agricultural pol- volume of revenue, and thus also
icy (CAP) as a mandatory expense is expenditure, is currently not allowed to
problematical, since it means that 45% exceed 1.27% of the Community gross
of the expenditure has been removed national product (GNP). The Own
from parliamentary control. Resources System includes genuinely
188 EU: Budgeting
own resources and contributions by ber states, the backflow from the CAP
EU members. as well as from the structure and the
coherence funds have led to difficult
Genuinely own resources net positions. Certain economically ad-
• Agricultural levies and agricultural vanced and productive member states
customs duties as well as the sugar such as the United Kingdom, France
and iso-glucose levy (production and and Italy form part of the net recipient
storage levy in the context of the countries.
Common Market regulations for To generate new revenues and as a
sugar). means to strengthen the competence to
use proceeds, an EU tax has been
• The customs duties that are imposed, repeatedly debated. In defending it,
according to the Community cus- both the Commission and the
toms tariff, on imports from non- European Parliament have argued that
member states. it would instil a greater sense of shared
responsibility and make the European
Contributions by the EU member tasks more tangible. Besides an increase
states of national VATs, among other things,
• Value-added tax (VAT) own the emission of carbon dioxide or the
resources, which result from the consumption of certain goods and serv-
application of a uniform rate (2007: ices (tobacco, alcohol, mineral oil,
0.33 percentage points) to a particular telecommunication) have been suggest-
uniform basis of assessment (no ed as tax subjects. The reason why an
more than 50% of GNP). Due to EU tax has so far been rejected might
political pressure, specific regulations be the perceived threat of a ‘tendency to
exist for certain countries (e.g. the an open transfer union’.
United Kingdom, Spain).
Budget and financial prognosis
• GNP revenue, which was introduced Budget creation as a decision-making
in 1998 as an ‘additional’ source of process on EU income and expendi-
income, i.e. as residual funding for ture:
the Community budget. It is calculat- The EU Commission submits a
ed with the help of a rate that is re- preliminary draft budget to the EU
assessed annually during the budget Council. On account of the different
debates and applied to the total of the categories of expenditure (mandatory
GNPs of all member states. and non-mandatory), the European
Council and the European Parliament
The most important sources of jointly make up the Budget Authority.
income for the EU are GNP and VAT Both institutions communicate on a
own resources. regular basis.
Meanwhile, the specific regulations Subsequent to the recommenda-
for individual countries, allowances for tions of the Council, the preliminary
the non-uniform economic structures draft budget becomes the budget pro-
and stages of development in the mem- posal, which goes to Parliament for its
EU: Budgeting 189
first reading. At this point, suggestions the collective resignation of the

for amendments to mandatory and Commission under its president,
non-mandatory expenditure can be Jacques Santer in 1999 due to the
submitted. refusal of release by Parliament after
During the second reading, the irregularities in the use of funds had
Council has authority to finalise the been discovered.
mandatory expenditure. Parliament, in
a concluding second reading, has the Outlook
task of finalising non-mandatory Important steps regarding the EU’s
expenditure. The only way Parliament budgeting are Agenda 2000 (adopted at
can influence the mandatory expendi- the Berlin Summit of the European
ture is by rejecting the budget in its Council in March 1999) as well as the
entirety. approval by the European Council of
After the parliamentary statement the Treaty of Nice (December 2000).
on the budget proposal, the president of It is mandatory that all EU mem-
the European Parliament accepts the bers make their contribution to the
proposal. At this point, the budget is running of the Community. To what
ready for implementation. extent members are entitled to a share
The monitoring of adherence to of the revenue depends on the criterion
proper budgetary procedures falls on of their economic performance. To
internal authorities and on the what extent members have to con-
European Auditor General as the exter- tribute to the expenditure (returns), is
nal inspector. Beyond that, efficiency dependent on how economically devel-
checks are carried out based on the oped they are (structural policy) and on
evaluation of individual projects. The what proportion of their GNP comes
discharge of the Commission by the from the agricultural policy. As a conse-
European Parliament completes the quence, there are different net payer
budgetary cycle. Such a discharge has and net recipient positions.
not, however, been granted for several While the net recipients are more
years. The fact that this right is still a inclined to defend the status quo of the
powerful way of making EU policy financial constitution, the net payers are
more transparent was demonstrated by pressing for reforms. And despite vocif-
EU Budget 2007: Resources by type of revenue
Type of revenue s million %
Agricultural duties and sugar levies 2,019.80 1.7

Customs duties 15,287.90 13.2
VAT based resource 17,827.41 15.4
GNI based resource 79,152.84 68.5
Miscellaneous + surpluses, balances and adjustments 1,209.27 1.0
Total 115,497.22 100
Source : European Commission: Budget 2007

190 EU: Competition policy
erous declarations of such intentions, lungsposition für die Agenda 2000 und ihre
Agenda 2000 has to date not brought Umsetzung, in: Hasse, R. H.,/Kunze, C.
about any essential reforms. All the dis- (ed), Osterweiterung der EU. Reformbedürfnisse
und Anpassungsschritte, Leipzig, pp. 137-149.
cussed reform proposals of the Own
Resources System have failed because
of the resistance of the net recipients. Alexander Schumann
A fundamental reorganisation of the
expenses (amendments to structural
policy, reform of the CAP) did not EU: Competition policy
achieve a majority of votes. The key
boundary remains the specification of An important aim of the economic
the upper limit for expenditure of integration of Europe, according to
1.27% of the GNP of the Community Article 2 of the Treaty establishing the
(prices date back to 1999). Current European Community (EC) is to raise
expenditure is below this upper limit, ‘the standard of living and quality of
which means that there is financial life’ of people. This is the foundation
scope for EU enlargement and its proj- for the creation of the common market,
ects. also known as the internal market.
Regarding the Own Resources The competition policy instruments
System, the European Commission was are intended to guarantee that the
asked to submit proposals on the distri- exchange of goods and services within
bution of liabilities ahead of the next the common market takes place accord-
round of negotiations on the post-2006 ing to the rules of competition (→sup-
financial framework. The expenditure ply and demand). This is not just a polit-
arising from the new EU members ical policy of the Community; rather, it
must also be taken into account. The has its roots in the legally binding regu-
EU enlargement on the agenda for the lations of the European Community
next few years will likely increase the Treaty.
heterogeneity of the member countries. The creation of a common market
This could exacerbate the conflict of defined by →competition in Europe
interests between the net recipients and requires that national markets open up
the net payers. The new majority pro- by abolishing national restrictions typi-
portions could also represent a stum- cal of cross-national trade, and that
bling block for the reform of the EU competition be protected from limita-
financial constitution. tions or manipulation by the market
participants themselves.
The concept of opening up national
REFERENCES:
markets comes from the explicit defini-
Internet pages of the EU INSTITUTIONS
tion of the internal market in the
can be located through www. europa.eu.int;
INSTITUT FINANZEN UND
Treaty: ‘The internal market shall com-
STEUERN (1999), Der Haushalt der Euro- prise an area without internal frontiers
päischen Union – eine Bestandsaufnahme, IFSt- in which the free movement of goods,
Schrift 372, Bonn; HASSE, R. H./PEN- persons, services and capital is ensured
ZOLD, A. (2000), Die deutsche Verhand- in accordance with the provisions of
this Treaty’ (Article 2(2) of the EC as well as the control of mergers or

Treaty). ‘merger regulation’). →Competition is a
The member states must abolish process of the rivalry of offers and bid-
any restrictions that limit cross-border ders that supports the market opposites
economic trade – such as import or regarding the purchase or sale of goods
export bans, duties on imports or or services.
exports, or any other regulations that The instruments (competition
could restrict transnational economic parameters) that are implemented for
trade. In particular, a member state is this purpose are diverse (price, quality,
not allowed to discriminate against peo- quantity, service, innovation, etc.).
ple or economic goods from other Competition in this sense arises when
member states. This is legally guaran- the market participants are free to
teed by the prohibitions aimed at the implement diverse competition param-
member states that make it unlawful to eters and, for example, not be bound by
enforce existing restrictions or to intro- restrictions or obligations. Thus, the
duce new restrictions to the trade of competition regulations of the Com-
economic goods between member munity are against such restrictions or
states. obligations that the enterprises could
The effectiveness of these prohibi- implement for themselves or others.
tions is rooted in the fact that the enter- Enterprises restrict competition by
prise’s, employee’s and consumer’s implementing three strategies:
scope of opportunity is no longer limit-
ed to their respective home country; • Enterprises may coordinate their
rather their scope of opportunity now market behaviour by implementing
extends to the entire Community. The synchronised competition parameters
discrimination and restriction prohibi- (for example: pricing agreements,
tions form the foundation of economic common market division, waiver of
freedom for the economic participants. innovative product development).
The EC Treaty differentiates Article 81 of the EC Treaty strictly
between a series of special freedoms; prohibits coordinated activities such
particularly, the freedom to exchange as these.
goods and services, employee freedom,
the freedom of establishment for • Enterprises that occupy a dominant
→enterprises, the freedom of movement market position because they com-
of capital and the freedom of payment mand a high market share (i.e. when
transactions. These freedoms, taken they are able to meet the demand
together, cover all the economic alone as a supplier) can obstruct other
processes that can be considered enterprises in their ability to compete
transnational. (for example: dumping to obstruct
competitors, the use of non-uniform
The ‘competition rules’ form the foun- sale prices when doing business with
dation for the creation of a competition various commercial enterprises,
system within the common market delivery refusal). Article 82 of the EC
(Articles 81(s) and 82 of the EC Treaty Treaty strictly prohibits such exploita-
192 EU: Education and research policy
tions of the dominant market posi- REFERENCES:
tion. MESTMÄCKER, H.-J./ SCHWEITZER,

H. (2004), Europäisches Wettbewerbsrecht, 2nd
edition, Munich; BUNTE, H.-J. (2003),
• Enterprises that merge into one eco-
Kartellrecht, Munich; COMMICHAU, G./
nomic unit can secure a dominant
SCHWARTZ, H. (2002), Grundzüge des
market position. This is fundamen- Kartellrechts, 2th edition, Munich;
tally prohibited by the merger regula- EMMERICH, V. (2001), Kartellrecht, 9th edi-
tions of the EC. tion., Munich.
Peter Behrens
As a final point, the EC Treaty
makes reference to the distortion of
competition in the common market
concerning aid granted by states. An EU: Education and research policy
enterprise’s market success should be
dependent on performance and not on Domestic education systems have gen-
who receives the highest →subsidies. A erally remained closed to the outside
subsidy competition would be incom- world. This holds true for Germany,
patible with the common market. too, where it is not easy for European
Accordingly, the Community enforces and other foreign competitors to
strict aid supervision in the member intrude. Only students who can afford
states. Article 87 of the EC Treaty strict- to do so privately or who are studying
ly prohibits state aid. Exceptions may be by way of exchange, are able to go
authorised or allowed under certain cir- abroad.
cumstances. Europeanisation, and even more so
The implementation of economic economic and social →globalisation, rep-
freedoms as well as competition regula- resent enormous challenges for educa-
tions falls primarily on the administration systems, just like for certain sectors
tive bodies and courts of the member of the service and tertiary industries
states. (telecommunication, energy industry)
A special characteristic of the when they were government-run and
Community law is that these rules enjoyed a captive market.
apply to the member states directly, and In the education sector, the impact
that citizens and enterprises can make is even greater because capital markets
claims at their local member state have become globally integrated, and
administrative bodies and courts to because investments and jobs are creat-
ensure that their rights to restriction- ed in places which are economically
free transnational economic trade and profitable and where properly trained
competition can be delivered. The indi- workers are available, both now and in
vidual freedom of economic action, the future. As a result, job markets are
established through Community law, is also becoming more international.
the foundation and goal of competition Beyond that, Europe will gain political
policy. and social stability only if there is mutu-
al understanding between people and if
their co-existence rests on shared val-
ues. The education system in the the standard of basic and further educa-
United States has achieved astonishing tion, and to facilitate skills training.
results in this respect, by moulding The Treaty of Amsterdam added
people of the most disparate back- nothing to this agenda (Articles 149,
grounds into a society. The European 150). Its preamble merely stresses the
system, under different conditions, will determination of the member states to
have to become similarly successful if keep access to education and further
the →European Economic and Monetary education wide open, and to assist their
Union is to endure, the development of peoples in attaining the highest level of
the political union is to continue, and learning possible.
the European economy is to become The European Union (EU) has
more competitive at a global level. addressed its task by launching numer-
But what sort of education policy ous programmes (Erasmus, Socrates,
does Europe need in order to meet Leonardo, etc.), all of which require
these challenges? The Treaty of Rome considerable funding and the necessary
did not invest the European Com- administration.
munity (EC) with autonomous powers In terms of systematic policy
in the field of education and research. creation, these measures have not gen-
All the European Commission could erated many tangible results. Not-
do was to submit proposals to the withstanding the existence of exchange
European Council regarding a com- programmes, the EU is a long way off
mon vocational education policy and to an open education market that ensures
institute directives on the recognition free movement across a country’s geo-
of diplomas and other certificates of graphical, political and administrative
competence. Only with the Maastricht borders. This applies to students as
Treaty did this situation change much as to their teachers, professors
(Articles 126, 127). and other academics who may want to
The EC was given the task of work- study or work in another EU country.
ing towards a high level of educational Pupils may go to school abroad, either
standards by supporting and comple- in or outside Europe, only in the con-
menting cooperation among and the text of a student exchange programme,
activities of the member states, while at except in the case of a private school
the same time strictly monitoring their which charges fees. Public sector
adherence to the contents and structure schools are not motivated to accept
of the education system. pupils from abroad, whether they come
Since then, the Commission has from inside or outside Europe, since
been concentrating its efforts particu- this merely causes extra work without
larly on the languages of the member bringing in extra revenue. In economic
states, the mobility of learners and terms, this is the equivalent of the
teachers, and the cooperation and primitive system of paying in kind. It is
exchange of information and practical inefficient and prevents the formation
experience. In the field of vocational of a uniform European education mar-
training, the priorities were to support ket, which would be sustained and pro-
industrial transformation, to improve moted by pupils or students being able
194 EU: Education and research policy
to choose their school or university the Middle Ages it was normal for a
freely, while at the same time having the university to have a body of teachers
means to pay for their place. made up of many different nationalities.
It has to be remembered that those Today, the proportion of foreign profes-
who are studying abroad are not occu- sors at German universities is not more
pying a place at school or at university than 3.5% (including guest professors
in their own country. This means that who only stay for one or two semesters).
they ease the burden on the schools and By contrast, in the German economy,
universities at home. But above all, this almost 10% of workers are foreigners.
system creates healthy →competition Instead of focusing exclusively on
among the education systems and their legal interventions and the coordination
specific components, which would of the European education policies,
especially benefit the younger genera- there are many arguments in favour of
tion and also the economy and society, dismantling regulations and restructur-
and last but not least the taxpayer. ing the funding system (→education
Educational institutions would become funding) – something that would create
more highly specialised, while educa- a competitive European education mar-
tion and training would become more ket and lay the foundation for a political
productive. This means that the union. It would also mean that the
amount of knowledge communicated Bologna Declaration made by the EU
by a teacher per lesson would increase, in 1999 in which the education minis-
above all in foreign languages which are ters of the member countries and a
learnt faster and more easily in the number of European tertiary institu-
countries where they are spoken and in tions committed themselves to cooper-
which countries the student will simulation, could be more forcefully imple-
taneously gain a greater understanding mented.
of the national culture of other coun-
tries. Also, the cost of a place at school REFERENCES:
or university would go down for the LITH, U. van (1999), Falsches Vertrauen in
same reasons. Furthermore, the system den Bildungsprotektionismus, in: Handels-
blatt 5/6, p. 47; VERBAND BILDUNG
would be less regulated, giving teachers
UND ERZIEHUNG (1999), Bildung im
and lecturers more freedom of move-
globalen Dorf – neue Chancen für die Schule,
ment. More efficiency would be gained VBE-Dokumentationen, Bonn; PHILIPP, C.
because German teachers would be (1999), Auf dem Wege zum Europäischen
teaching in the United Kingdom, for Bildungsmarkt, Lohmar-Cologne.
example, and vice versa. Imbalances
(surplus or deficit of teachers or lectur- Ulrich van Lith
ers) and the national salary differences
for teachers, university lecturers and
other academics, which can be consid- EU: Employment policy
erable, would be gradually eliminated.
The degree to which the national Objectives
education industries have divided Among the key principles, objectives
Europe can be seen from the fact that in and activities mentioned in the Treaty
EU: Employment policy 195
of the European Union and the Comprehensive employment policy since

European Community Treaty is the the early-1990s
promotion of a high level of employ- The Essen Summit
ment in the Community. This is to be In the 1980s and the 1990s the
achieved through the development of a European Council adopted a number of
coordinated employment strategy, in resolutions on the job situation; but
particular regarding the promotion of only in 1993 did the EU initiate serious
qualified, trained and flexible workers discussions on how to solve the
for unpredictable job markets, which employment problem at a European
react to economic change. level. The 1993 Commission white
It is true that the Treaty of Amster- paper on ‘growth, competitive ability
dam brought about the introduction of and employment’ (the Delors report),
coordinated measures; but the general which contains constructive sugges-
competence for measures against tions for the improvement of the job
→unemployment continues to be vested situation, has to be seen in this context.
with the member states. In December 1994, based on this
white paper, the foundation for a com-
Results mon European employment strategy
was laid at the Essen conference of the
The first instruments: European Council. This was achieved
through an urgent appeal to the mem-
• The European Social Fund, which ber states to convert the Essen priorities
was established at the beginning of into programmes that run for several
the 1960s, is the Community’s most years and are assessed annually by the
important instrument for fighting heads of state and government in the
unemployment. Council.
The five key areas are:
New initiatives during the 1980s and at
the beginning of the 1990s • greater investment into vocational
• →Employment policies for special target training;
groups: the long-term unemployed,
local employment development and • an increase in the employment inten-
support of small- and medium-sized sity of →growth;
→enterprises (SMEs).
• lowering of the ancillary costs of
• An information network on the wages;
employment policies of the member
states and a joint documentation sys- • increased effectiveness of →labour
tem on employment. market policy; and
• Promotion of free personal move- • improved measures in favour of the

ment and support for workers who groups especially affected by unem-
are searching for employment in ployment (young people, the long-
another member state. term unemployed).
196 EU: Employment policy
The effectiveness of these proce- National Action Plan (NAP) for

dures was limited, however, because in employment, and envisage four head-
contrast to the regulations regarding the ings, namely:
→European Economic and Monetary
Union they had no legal basis in the • greater employability;
Treaty; therefore, the European
Parliament advocated the inclusion of • development of entrepreneurial spir-
an employment chapter in the revised it;
Treaty. This was discussed at the gov-
ernment conference of 1996/97. • increased flexibility of enterprises;
and
The Amsterdam Treaty
With the agreement on the draft of the • reinforced efforts to guarantee equal
Amsterdam Treaty in June 1997 and the opportunities.
introduction of a new employment
chapter, the EU created a legal instru- The guidelines for 1998 were offi-
ment for the introduction of a coordi- cially adopted on 15 December 1997. At
nated employment strategy. The mem- the end of January 1998, a common
ber states, which retain their exclusive framework for the NAP was agreed on.
competence within this area must nev- In June 1998 the European Council of
ertheless organise their →employment Cardiff stated regarding the NAP that
policies in such a way that they corre- the member states were making consid-
spond to the fundamentals of the eco- erable efforts to strengthen active
nomic policy of the Community, while labour policies. Furthermore, the
job promotion is regarded as a common Luxembourg Summit supported the
goal. The Council draws up annual funding of SMEs and innovative meas-
employment policy guidelines, which ures in the labour market, as well as an
have to be taken into account in the action plan for the European
policies of the separate member states. Investment Bank with the aim of secur-
Furthermore, the European Council of ing new loans for SMEs, new technolo-
Amsterdam also agreed to the immedi- gies and trans-European networks.
ate implementation of certain Articles
of the new employment agreement The Cologne Summit
without waiting for it to come into This 1999 Summit followed the
force. It declared that an extraordinary Amsterdam Treaty. An ‘employment
European Council conference should pact’ was agreed, which consists of
be held in November 1997 on employ- three processes, which have to be coor-
ment issues. This was the ‘employment dinated with one another:
summit’ in Luxembourg.
• Further development and implemen-
The Luxembourg Summit tation of the employment policy
The ministers explained their support guidelines, which were agreed at the
for the guidelines of 1998. The latter 1997 Luxembourg employment sum-
were supposed to be included into the mit (Luxembourg Process).
EU: Enlargement 197
• Institutionalisation of a cooperative EU: Enlargement

‘macroeconomic dialogue’ between
the bargaining parties, the →European The original (1957) European Com-
Central Bank, the European Council munity of the six founder states –
and the EU Commission (Cologne Belgium, Germany, France, Italy,
Process). Luxembourg and the Netherlands –
had by 1995 been extended to 15 mem-
• Reforms to promote innovation and bers as a result of three expansion
improved efficiency of the goods, rounds. The first of the new phases
service and capital markets (Cardiff (1973) saw the United Kingdom,
Process). Denmark and Ireland taking up mem-
bership. The second wave, the so-called
All three elements are supposed to southern expansion, conferred Com-
be mutually supportive. munity membership to Greece in 1981,
and Spain and Portugal in 1986. The
Risks last of these three expansion rounds
Different forms of and developments (1995) added the European Free Trade
regarding unemployment in the coun- Association states – Sweden, Finland
tries of the EU limit the possibilities for and Austria.
a European employment policy, since After the radical changes to the
they also require different methods for international system in 1989/90 and
the eradication of unemployment that after the end of the East–West conflict,
is deeply entrenched. Furthermore, a the 1990s presented the European
coordinated employment policy pre- Union (EU) with its first opportunity
vents organised →competition. Failures to consider Europe as a whole – some-
in the EU labour markets can therefore thing which was reflected in member-
not be excluded. ship applications from 13 countries,
which included 10 Central and Eastern
REFERENCES: European states.
EUROPÄISCHE ZENTRALBANK (2000), There were also membership appli-
Entwicklung und Strukturmerkmale der cations from the Mediterranean islands
Arbeitsmärkte im euro-Währungsgebiet, Cyprus and Malta, as well as Turkey
Monatsbericht Mai, pp. 61-79; INSTITUT
which had submitted its application as
FÜR ARBEITSMARKT- UND BERUFS-
long ago as 1987. Croatia submitted its
FORSCHUNG (1999), Rolle der Europäischen
Union in der Beschäftigungspolitik, IAB –
application in 2003 and Macedonia in
Kurzbericht 13; LESCH, H. (2000), 2004. Switzerland, Liechtenstein and
Brauchen wir eine Europäische Norway, however, have discontinued
Beschäftigungspolitik?, in: Politik und pursuit of their membership applica-
Zeitgeschichte, 14-15, Beilage zur tions.
Wochenzeitung Das Parlament, Bonn, pp. 14; The large number of membership
http://europa.eu.int/austria/links/beschäftigung.htm. applications as well as the hugely differ-
ing structural and economic profiles of
Ansgar Belke the aspiring candidates made the EU
expansion and the debate it sparked
198 EU: Enlargement
about which country should be granted state and government decided that
membership to the Union at which besides Malta, five further Central and
point in time and under what condi- Eastern European states – Bulgaria,
tions, one of the most important politi- Lithuania, Latvia, Romania and
cal questions in Europe. Slovakia – had made significant
When the Central and Eastern progress, and these countries were then
European states became members of allowed to join the Luxembourg Group
the Community, the population of the in February 2000. It was also agreed in
EU increased by more than a quarter to Helsinki to recognise Turkey as a coun-
nearly 500 million EU citizens, while try which was keen on membership,
the gross national product grew by only but without entering into any negotia-
15%. The heterogeneity of the Union, tions at that stage.
too, was markedly increased, consider- The basis of an EU decision on the
ing the Danish per capita income is six admission of new candidates was the
times that of Bulgaria and Romania. so-called Copenhagen (membership)
Closely linked to the expansion criteria which were drawn up by the
process were the hope of a European European Assembly in 1993: politically,
perspective and a ‘new order’ on the a new membership candidate has to
continent, as well as a concern about an have enough institutional stability to be
over-expansion of the Union or that able to guarantee a political system built
new members might not be able to on democratic principles and the rule of
meet their commitments – all of which law, where human rights are observed
could put too much strain on the EU. and minorities are protected. Eco-
In order to support the candidate nomically, the existence of a workable
countries during their preparation for market economy, as well as the ability to
EU membership, in 1994 the EU in the withstand the competitive pressure and
European Council of Essen agreed on the market forces inside the Union, are
an ‘approximation’ strategy. prerequisites.
In July 1997, the European Com- Beyond that, the membership can-
mission submitted its statement on the didates have to be able to take on the
membership applications of the 10 commitments arising from their
Central and Eastern European coun- membership in the form of the acquis
tries. In its report, the Commission rec- communautaire, which comprises all
ommended that membership negotia- valid contracts and legal acts, and to
tions be initiated with six states – besides adopt the aims of the political union
Cyprus also Poland, Hungary, the and of the economic and monetary
Czech Republic, Estonia and Slovenia. union. The legal regulations on the
After the European Assembly had admission of a new member state can
approved of the six countries in be found in Article 49 of the EU Treaty.
Luxembourg in 1998 (they are there- After hearing the Commission and
fore also known as the Luxembourg after the European Parliament has given
Group), it became possible to initiate its approval, the Council makes a unan-
membership negotiations in March imous decision. The actual member-
1998. In December 1999 the heads of ship conditions, the required periods of
EU: Enlargement 199
Member states of the European Union and candidate countries, 2007
transition and the amendments to the existing member states, especially the
Community treaties that new member- border countries Germany and Austria,
ship necessitates, are regulated through benefited from transition periods ex-
an agreement between the existing tending to several years, particularly
member states and the candidate state, where freedom of domicile was con-
and must be ratified by all states which cerned.
are party to the Treaty. In December 2002 the European
In the course of 2002, negotiations Council in Copenhagen was able to
on each of the 31 chapters of the acquis officially conclude membership negoti-
communautaire came to a positive con- ations with these 10 countries – just less
clusion for 10 out of a total of 13 mem- than nine years after the ‘Copenhagen
bership applicants, with only Bulgaria, Membership Criteria’ had been formu-
Romania and Turkey being left out. In lated. After the existing member states,
many cases, special regulations had to the citizens of the new member states
be put in place aimed at facilitating the and the European Parliament had given
transition of new member states not their agreement, the membership
financially able to implement all the EU treaties for the 10 new EU members
regulations immediately. But even were signed in Athens. On 1 May 2004
200 EU: Environmental policy
they joined the EU as new member the EU common market. Thus,

states. While Bulgaria and Romania national environmental protection
joined the EU at the beginning of 2007, subsidies are subject to EU monitor-
no date has been set yet for Turkey. The ing according to Article 87 of the EC
same goes for Albania, Bosnia-Herze- Treaty.
govina, Croatia, Macedonia and Serbia-
Montenegro, countries which have The EU justifies the many guide-
already received signals from the EU lines and regulations with the argument
that they may one day become eligible that similar environmental standards
for membership. for the production of goods should
exist in all member states of the EU.
REFERENCES: These are intended to guarantee that
LIPPERT, B. (2000) (ed), Osterweiterung der supply prices within the common mar-
Europäischen Union – die doppelte Reifeprüfung, ket do not differ based on varying envi-
Bonn; WEIDENFELD, W. (2002) (ed), ronmental costs.
Europa-Handbuch, Gütersloh.
However, why should cost factor
differences be allowed in all other areas
Jürgen Mittag
Wolfgang Wessels
but none in regard to the environmen-
tal factor (→environment-oriented manage-
ment)? Furthermore, the expense costs
can be different between the member
EU: Environmental policy states, while some regions may be more
heavily strained making more stringent
Market competition for goods is an production standards necessary.
important principle of the →social mar- Essentially, environmental protec-
ket economy. In the course of political tion is an input factor that is in varying
→integration in Europe, it follows that demand and is being supplied accord-
the protection of competition does not ing to changing priorities based on
halt at the borders of the European income differences. The advantages of
Union (EU) member states, rather it national production standards are set
applies to the entire EU market: against the danger of environmental
dumping. Accordingly, lax national
• Environmentally relevant product environmental standards would be put
regulations of the member states in place to attract capital and mobile
should not lead to the obstruction of →enterprises to certain locations.
trade, either wanted or unwanted In democracies, location competi-
(protectionism). In practice, har- tion is not solely accomplished at the
monised minimum standards are expense of the environment, which
agreed in advance according to Article means that economic growth and
96 of the EC Treaty. employment are not given preferential
treatment over the protection of the
• Regarding environmental protection, environment. Environmental quality is
member states of the EU could allow the key factor for enterprises in relation
aid that would distort →competition in to environmental infrastructural facili-
EU: Environmental policy 201
ties and the selection of personnel. the air or water, the emitting nation is to
Environmental pollution is a loss of cover the costs of the environmental
welfare for the citizens. Thus, the polit- pollution. At first glance, the emitting
ical process weighs the concrete advan- nation would not appear to have an
tages against the tangible disadvantages. incentive to consider the profit to the
The varying environmental quali- investment in the environment outside
ties of the member states arise from dif- national borders. As the other member
fering preferences, costs, →income, etc. states are in a position to profit from the
As long as the costs and advantages of improved environmental quality with-
environmental policy are concentrated out participating in cost sharing, the
within the member states and follow environmental pollution of the emitting
the democratically created political reg- source is outweighed.
ulations, decisions regarding the man- A framework designed to deal with
ner in which national environmental this dilemma and the national as well as
problems are to be dealt with and extra-territorial advantages (costs) of
enforced can be bestowed on the mem- environmental investment is required.
ber states. These circumstances do not The larger the group of affected mem-
mean that the applicable EU regula- ber states (e.g. large-scale air pollution),
tions regarding national environmental the more meaningful it is to coordinate
policy cannot be enforced; however, activities at the EU level; otherwise, the
they do mean that implementation is affected countries can reach an agree-
tied to the voluntary adoption on the ment on their own. These negotiations
part of the member states. can be executed more effectively and
The polluter-pays principle out- lead to conflict resolution if there is an
lined in the Treaty of the European institutionalised order element like the
Union can be traced back to common polluter-pays principle. Here, again, a
preferences; at the same time, this prin- rule corresponding to the social market
ciple also allows for meaningful solu- economy is the key factor for the pro-
tions to national environmental issues. tection of the environment.
These procedures – from the perspec-
tive of the politics of social market REFERENCES:
economy – are to be actively imple- KARL, H. (1999), Die Europäische Union

mented as they are based on the gener- auf dem Weg zu einer ‘Umweltunion’?, in:
Barz, W./ Hülster, A./ Krämer, K./ Lange, M.
al regulations and the decentralisation
(ed), Umwelt und Europa, (= Vorträge und
of political competences, as well as the
Studien des Zentrums für Umweltfor-
principle of subsidiarity. schung der Westfälischen Wihelms-
This is also valid when transnational Universität Münster, Heft 9), pp. 49-69,
environmental issues arise. Regardless Landsberg; — (1998), Umweltpolitik, in:,
of the degree of the political integration Klemmer, V. P. (ed), Handbuch der
process, a coordinated →environmental Europäischen Wirtschaftspolitik, Munich, pp.
policy is advantageous in a situation such 1001-1151; WELPER, C. (1999), Europäische
as this – by contrast with national envi- Umweltpolitik, Marburg.
ronmental problems. With transnational
pollution, e.g. through emissions into Helmut Karl
202 EU: History
EU: History the experience gained during the close

cooperation in the economic field
The beginnings of the European Union would have a ripple effect on the more
(EU) dates back to 1952 when the sensitive political areas.
European Community for Coal and The speedy implementation of
Steel (ECCS) was founded. The other- important stages of the Treaty of Rome
wise standard contract under interna- (as the EEC and the EAC treaties were
tional law, to which six member states also called) led to a renewed attempt to
were parties, stood out in that common pursue the goal of a European political
institutions were established (High union that would have gone beyond
Authority Commission; Parliamentary mere economic integration (Fouchet
Assembly, later: European Parliament; plans 1960/62). But this time, also, the
Council of Ministers; Court of Justice), attempt to give the steps towards inte-
which were authorised to act on behalf gration a common political denomina-
of the Community. tor failed.
Initially, industries important for Less spectacular progress was made
military purposes had been successfully with the Own Resources System of the
dealt with on a Community basis in the EEC (1971); the European Parliament
context of the ECCS, but the next step and the Council’s joint responsibility
was to create a European defence com- for the EC budget (1975); and the first
munity, complete with a European direct elections of the European
army. This plan failed in 1954, together Parliament (1979). Nonetheless, the
with the attempt to bundle the steps supra-national efforts of the integration
towards →integration which had been were stagnating. During the 1970s,
taken so far, in a European political reform plans were defeated by the
community. The indirect consequence growing weight of the member states
was the expansion of the Brussels Pact inside the EEC and by the diminishing
(1948) on the Western European external pressure on Western integra-
Union, which had come into force in tion, brought about by the policy of
1955. This organisation, which had not détente directed towards Eastern
been part of the common contractual Europe.
agreement, gradually started to be Under these circumstances, the
introduced almost completely into the integration process became more
legal stock of the European Union. focused on political fields outside the
The first comprehensive political confines of the Treaty of Rome, and
attempt at integration did not succeed. harking back to traditional methods of
This prompted the decision among the intergovernmental cooperation: Regular
founder states to continue pursuing the communication on foreign policy from
route of economic integration. After 1970 (European Policy Cooperation
coal and steel (ECCS), further sectors [EPC]; 1972 Currency Snake, 1979
were integrated (1958 European Eco- European Currency System (ECS);
nomic Community [EEC]: agriculture 1974 regular meetings of the heads of
and customs system; EAC: nuclear state and governments of the EEC
energy community). It was hoped that member states (European Council).
The first reform of the Treaty of hand, was an attempt to achieve an ade-
Rome by the Uniform European Act quate integration of the institutional
that followed was a step in the right apparatus into the EU that, on the eve of
direction after this ‘intergovernmental the largest round of expansion talks in
phase’ of European integration (1987). its history, counted 15 member states.
Key elements were the ‘second attempt’ During the summit in Nice, the heads
to have completed the establishment of of state and government adopted the
a European domestic market no later Human Rights Charter of the EU
than 31 December 1992, as well as the (including a chapter on ‘Solidarity’).
integration of the EPC and the The statement on the future of the EU,
European Council into the Commu- which was also adopted, formed the
nity treaties. basis for the convention called to work
The 1990s saw one treaty reform out a constitutional EU Treaty making
after another: the Treaty of Maastricht the contents, structures and procedures
(1992) saw the legal incorporation of of the EU more transparent, more dem-
the →European Economic and Monetary ocratic and more efficient.
Union into the EC Treaty and at the
same time the firm establishment, at a REFERENCES:
European level, of important elements GASTEYGER, C. (1997), Europa zwischen

of the →social market economy in the EU, Spaltung und Einigung, Darstellung und
Dokumentation. Bonn, Bundeszentrale für
such as the foundation of an independ-
politische Bildung, Schriftenreihe 348;
ent central bank.
WEIDENFELD, W.(1999), Europa – aber
The contract was given its already wo liegt es?, in: Weidenfeld, W. (ed), Europa-
distinctive temple structure: the ‘Treaty Handbuch, Gütersloh, pp. 19-48.
on the European Union’ is held up by
three columns (European Community Melanie Piepenschneider
– EC; Common Foreign and Security
Policy – CFSP; cooperation in the areas
of Justice and the Interior – CJI), each
of which is important for the process of EU: Industrial, research and
integration in a different way. technology policy
The EEC Treaty gradually grew into
the ‘Treaty on the Foundation of a The Unified European Act (1987) and
European Community’ (EC), which the Treaty of Maastricht (1992) signifi-
was supposed to give expression to the cantly increased the competence of the
increased importance of political issue European Union (EU) in the field of
in the EU. research and technology policy. In
Through the Treaty of Amsterdam Article 130, a group of objectives for
(1998), among other things, a space was industrial policy was agreed for the first
created for security, freedom and the law time at EU level. This was subsequent-
as an (internal) equivalent to the (eco- ly expanded in the Treaty of Amster-
nomic) domestic market and (external) dam. Article 163, section 1, reads:
Common Foreign and Security Policy. ‘The Community aims to strength-
The Treaty of Nice (2000), on the other en the foundation of the EU’s industri-
204 EU: Industrial, research and technology policy
al sector through science and technolo- funding, however, is limited to the

gy while promoting its ability to com- costs of administration.
pete internationally. It aims to lend its
support to all research projects which • Horizontal actions have grown in
other sections of this treaty may deem importance over the past number of
necessary.’ years. These offer opportunities for
In order to enhance its international scientists to meet and exchange their
competitive advantage, the Community research results, while also forming
has to identify key areas in industry. the basis for an efficient spill-over to
This means it is implementing ‘design the other categories of the pro-
policies’ (W. A. Jöhr) in the field of gramme, especially the indirect
industrial economy. In this respect, the actions. In this case, the EU funding
industrial, research and technology pol- can be as high as 100%.
icy of the EU can be interpreted as
→industrial policy, oriented along the The EU’s industrial, research and
lines of technical progress or focused technology policy can be divided into
on economic innovation. four phases of development:
In order to achieve its goals, the EU
promotes cooperation between →enter- • The first phase (1951–1973) was
prises, research centres and universities mainly concerned with the construc-
across the national borders of its mem- tion of Community policies and
ber states. In addition, it supports the research – limited to the sector of
transfer of research outcomes and the nuclear power and related technology.
mobility of scientists.
These measures are implemented in • Expanding competences in the area of
four different ways: industrial, research and technology
policy was the theme of the second
• Indirect actions are the most impor- phase (1974–1980). It was charac-
tant, receiving about 75% of the avail- terised by a greater focus on a more
able funding. In this case, one is deal- active Community role.
ing with research projects that are
carried out by companies and scien- • Characteristics of phase three
tific institutions, with the EU cover- (1981–1987) were the development
ing a maximum of 50% of the costs. of a proactive industrial policy and
the reorientation of the industrial,
• Direct actions are reflected in the research and technology policy.
research carried out by the EU itself
in the Community research institu- • Phase four began in 1987 with the
tions and in the common enterprise theme ‘Europe on the way to becom-
Joint European Torus. ing a technological Community’.
• →Concerted Actions are the attempt by This fourth phase is marked by

the EU to coordinate research and more tangible action and greater
development activities; the financial emphasis on industrial, research and
technology policy within each of the framework programmes there is no

framework programmes. The fourth such thing as a joint European industri-
framework programme (1994–1998) al, research and technology policy. Its
was already put together along the lines critique implies that the research poli-
of this new orientation. Its main focal cies of the individual member states and
point was information and industrial as of the EU itself are often running paral-
well as energy technology. lel, meaning that both bodies are active
Eight task teams (work units run by in the same fields. The phenomenon of
experts) were set up with the aim to double research is hereby addressed –
contribute to the construction of a which the Commission sees as a waste
global information society. They serve of resources.
as coordinators and packagers of indus- From the point of view of competi-
trial, research and technology policy tion policy, however, double research is
activities in Europe, and deal with top- not to be absolutely rejected. The more
ics with an impact on the future, such as mature concept will win at the end of
the ‘multi-media learning programme’. the development process. Moreover,
The task teams are supposed to help the the time that a new technology takes to
market maturation of technologies. As be developed is markedly shorter, since
this method is controversial from the the research teams are motivated by the
perspective of institutional order policy, desire to be the first to present their
one wonders how seriously the Com- results.
mission takes the definition of ‘pre- The sixth framework programme
competitive’ research. (2002–2006) marks the start of phase
The fifth framework (1998–2002) five, entitled ‘Research in Europe’. The
introduced a new concept, restricting goals set by the European heads of state
the research effort to those areas which and government at the European
yield tangible benefits for the common Council in Lisbon (March 2000)
person, especially in terms of →employ- included the transformation of the EU
ment, quality of life, and technologies into the world’s most competitive and
that are able to compete internationally. most dynamic knowledge-based econo-
The restriction to a limited number of my, capable of achieving continued
themes, such as ‘quality of life and growth, full employment and more
management of living resources’ or social cohesion by 2010. With this in
‘competition-oriented and sustainable mind, the EU is eager to provide more
growth’ increases the effectiveness of funds for the promotion of scientific
the respective measures. A further excellence, both in the EU member
innovation concerns the criteria that are states themselves and in the rest of
applied in the project selection. Out of Europe. It is planned to step up the pro-
a list of criteria, social needs, economic portional expenditure for research and
development as well as perspectives of technical development from 1.9%
science and technology have been (2000) of GDP to almost 3%, with pri-
selected for their specific relevance. vate sector contributions towards
In January 2000, the EU Commis- research and development expenditure
sion stated that despite the Community expected to rise from 56% to 66%. To
206 EU: Industrial, research and technology policy
make this a reality, the EU provides a represent a departure by the EU from

budget of s16.27 billion. Its involve- the sphere of basic research, since this
ment is focused on those areas of instrument has been conceived specifi-
research which promise the greatest cally with tangible outcomes in mind.
added value for Europe. The EU has These might even include specific
recognised the need to create a critical products or techniques. The integrated
mass of financial and human resources projects are supposed to be implement-
and to pool the complementary skills ed by public-private partnerships.
available in the different countries, The sixth framework programme
thereby making Europe a better place was also conceived for the promotion of
for research. international cooperation and to accel-
The connection between the priori- erate European integration. For this
ties and interests of the EU and the purpose, for example, the funds for the
transnational nature of research is also promotion of the international mobility
important. The simplification and of scientists have been increased.
streamlining of the procedural rules are Whether the industrial, research and
meant to enable small and medium- technology policy will be equal to this
sized enterprises (SMEs) to gain easier task remains, however, to be seen.
access to the available resources of the
EU. The difficult and complex applica- REFERENCES:
tion procedures of the past ensured that EU-KOMMISSION, KOM (2001) 94

SMEs used to be largely excluded. But endg.; Vorschlag für einen Beschluß des
Europäischen Parlaments und des Rates über das
for the new framework programme, the
mehrjährige Rahmenprogrammemem 2002-2006
EU will also change its funding meth-
der Europäischen Gemeinschaft im Bereich der
ods. From now on, the plan is to have Forschung, technologischen Entwicklung und
three main instruments: networks of Demonstration als Beitrag zur Verwirklichung des
excellence; integrated projects; and EU Europäischen Forschungsraums, Brussels, 21
participation in programmes which, on February 2001; STARBATTY, J./VETTER-
the basis of Article 169 of the EC Treaty, LEIN, U. (1998), Forschungs- und Techno-
are carried out in collaboration with logiepolitik, in: Klemmer, P. (ed), Handbuch
other countries. Europäische Wirtschaftspolitik, Munich, pp.
The latter instrument is different 665-733; SZETTELE, D. (2000),
from the other two because the initiative Auswirkungen der Industriepolitik in der EU auf
and the main emphasis come from the die internationale Wettbewerbsfähigkeit der
europäischen Wirtschaft, Freiburg i. Br.
EU. This is expected to encourage more
top-class achievements in the field of
Andreas Schumm
European science and technology. The Joachim Starbatty
continuing concentration of scientific
talent which exists in the various
European regions is supposed to guar-
antee this. The EU gives financial sup- EU: Maxims for action
port to the integration with a wide range
of flexibility within the research net. The economic policy of the European
The integrated projects in particular Union (EU) comprises – as in the case
of the economic policy of the member responsible should the Community

states – the establishment of legal become involved.
norms that govern private and state- This allocation of responsibilities is
owned economic agents (→institutional in principle correct. However, some sit-
order policy) and the state influences on uations are vague and the allocation of
the economic activity (→process policy). responsibilities is at the discretion of
The EU is a multilevel system that the Community. This means that con-
comprises the levels of the European sideration must be given to the uniform
Community (EC), the member states, or harmonised legislation and policies
the countries or provinces, districts and of the European Common Market
municipalities. In the first place, the (decrease in transaction costs for
appropriate level for certain policy areas →enterprises and consumers), the eco-
or objectives needs to be decided on a nomic costs, the second- and third-best
case-by-case basis. Second, the type and solutions arising from a common
intensity of collaboration between the agreement and the advantages of →com-
EU and the member states needs to be petition between the different national
decided. concepts (educational effects).
Regarding the first question, the Some policies are either wholly or
Maastricht Treaty of 1992 anchored the comprehensively ‘communitarised’, i.e.
subsidiarity principle in the EC Treaty. national decision-making powers have
This was in part a reaction on behalf of been withdrawn (e.g. →EU: trade policy,
state and government heads to the pre- →EU: agricultural policy, →European
diction expressed by Commission monetary policy, market access for citi-
President Delors to the European zens of the EU, enterprises, free trade
Parliament (6 July 1988) that in 10 years, of goods and services) and others are
80% of the economic legislation – and subject to common minimum stan-
perhaps also the tax and social legislation dards as well as other limitations (e.g.
– will be of EU origin. According to the valued-added taxes and excise duties,
principle of subsidiarity, the Com- subsidies, technical norms, consumer
munity becomes active in areas that do protection, environmental standards).
not fall within its exclusive competence On the other hand, member states con-
only ‘in so far as the objectives of the tinue to be free to design important
proposed action cannot be sufficiently local conditions (labour market regula-
achieved by the member states and can tions, direct taxes, education system,
therefore, by reason of the scale or infrastructure policy), social systems
effects of the proposed action, be better (→pension insurance, →health insurance,
achieved by the Community’ (Article 5, →unemployment insurance) and the con-
EU Treaty – new). tinual financial policy (amount and
Ideally, regulations and instruments structure of the public revenue and
are to be reached on a decentralised government expenditure).
basis, at the level of the member states Regarding the second question, the
or regions and only in instances where collaboration between the EU and the
a central (European) regulation is con- member states sometimes requires rati-
venient or where the EU is explicitly fication from the national parliaments
208 EU: Maxims for action
of the member states concerning legal the decision-making process, to agree-

frameworks (amendments to the EU ments based on common ground and to
and EC treaties) as well as on matters of the linking of diverse subject areas in
EU membership. The concrete imple- negotiation packages. The Community
mentation of these legal parameters can interests are represented by the
be realised in many different ways. Commission, the European Parliament
With regard to setting medium- and the European Court of Justice.
term binding legal norms, the Council The Commission monopolises pro-
(of Ministers) passes guidelines and posals in that the Council can become
regulations and makes decisions based active only when a proposal from the
on the recommendation of the Commission has been presented.
European Commission, with varying However, the proposal has usually been
involvement of the European Parlia- clarified with national bodies in order
ment. The Council’s decisions must be to increase its chances for success
made unanimously or according to (→EU: organs and institutions).
majority vote. This is also true for the The collaboration between the
realisation of the five fundamental national and European political and
rights (free trade of goods, services and administrative structures, as well as the
capital, personal free domiciliation, functions and competences of econom-
freedom for enterprises to establish ic policy in the EU system, would
businesses), the entire area of the appear to be highly complex and con-
Common Market (product- and mar- fusing; yet at the same time this system
ket-related regulations) as well as the is anything but static and it is defined by
EC budget. dynamic transition.
Individual measures, recommenda-
tions and positions are made by the REFERENCES:
Council (e.g. intervention prices in KLEMMER, P. (ed) (1998), Handbuch

agricultural policy, commercial policy Europäische Wirtschaftspolitik, Munich; WEI-
DENFELD, W./ WESSELS, W. (eds)
protection measures, economic stabili-
(1998), Europa von A-Z, Taschenbuch der
sation policy recommendations) or by
europäischen Integration, 7th edition, Bonn; —
the Commission (e.g. competition and (eds), Jahrbuch der Europäischen Integration,
subsidy monitoring, initiation of breach Bonn, current classes.
of treaty proceedings, research subsi-
dies) or, with regard to monetary policy, Hans-Eckart Scharrer
by the European Central Bank.
The Council is both a legislative and
executive body. It shares responsibility
for legislation with the European EU: Organs and institutions
Parliament, and shares the tasks of gov-
erning and administering with the As they are moving towards an ‘increas-
Commission. The function of repre- ingly close-knit union of the peoples of
senting interests of the member states Europe’ (Article 1 European Union
requires a procedure that strives for con- Treaty [EU-T]), the institutions of the
sensus. This leads to lengthy delays in European Union are becoming the ulti-
Organs of the European Union
European Council
European
Court of
Justice
European Council (of the
Commission European Union) European
Court of
Proposals Decisions Auditors
European
ESC Central Bank
(Economic and Social
Committee)
European
Parliament
CEMR
(Council of European Binding
Municipalities and
Regions)
decisions
Member States
mate decision-making powers in a police and judicial cooperation in crim-

growing number of political fields. inal matters.
Notwithstanding the ‘unified insti- In the first column, the key compe-
tutional framework’ (Article 3 EU-T) tences at the European level have been
of the EU, the preparation, creation, distributed among five institutions –
implementation and control of legal the European Commission, European
acts through the European institutions Parliament (EP), Council of the EU,
are still dependent upon their respec- European Court of Justice (EuCJ) and
tive political field, and therefore subject European Council. At the same time,
to varying degrees of political participa- the European Auditor General (EuAG),
tion and involvement in each of the dif- the Council of European Munici-
ferent ‘columns/pillars’. palities and Regions (CEMR) and the
Besides the predominantly supra- Economic and Social Committee
national character of the first column, (ESC) also play a decisive role in the
which is about the European commu- institutional structure. Other important
nities and the EU domestic market, the organs are the European Central Bank
wording of the treaties also embraces (ECB), the European Investment Bank
the second pillar, which is equipped (EIB) and the ombudsman.
with inter-governmental powers relat- The European Commission (Articles
ing to joint external and security poli- 213-219 EC-T) is the executive and
cies, as well as the third pillar with its administrative organ of the EU with its
equally international features for the headquarters in Brussels. The adminis-
210 EU: Organs and institutions
tration consists of about 16,000 civil qualified majority. In the case of quali-
servants in 23 head offices and other fied majority votes, the votes in the
offices. Due to its exclusive right to Council of Ministers are weighed
propose legislation, the Commission – according to the population size of the
which is not subject to national govern- member states.
ment directives but takes decisions as a The European Council, which con-
cooperative organ – plays a key role in sists of the heads of state and govern-
the first column during the phase lead- ment of the member states, as well as
ing up to a vote. As a ‘motor of integra- the president of the European Com-
tion’, it identifies problems, draws up mission – supported by their ministers
agendas and formulates draft proposals of foreign affairs and by other members
for votes. Beyond that, in its capacity as of the European Commission – occu-
‘executive’, it takes, as far as it is autho- pies a special position within the insti-
rised, binding executive decisions, tutional structure of the EU.
guarantees the proper functioning of In its capacity as ‘architect of the
the common market, is in charge of the constitution’, the European Council
Community budget and negotiates has been deeply involved in the practi-
international agreements. In its capacity cal development and organisation of
as ‘guardian of treaties’, the Commis- European treaties since 1974. The
sion supervises and monitors the appli- European Council meets four times a
cation and observation of the year and serves – despite not officially
Community law. being an organ of the EC – as the high-
The Council (of the European est and final decision-making body. As
Union) (also known as the Council of ‘setter of guidelines’, it serves especially
Ministers) (Articles 202-210 EC-T) is in the fields of economic policy and the
the key legislative organ of the EU, joint external and security policies and
which, however, has begun to share its in its capacity as the ‘highest organ of
legislative and budgetary role increasing- appeal’ for controversial issues in the
ly with the European Parliament. It con- common policy areas.
sists of one (expert) minister per mem- The European Parliament (Articles
ber state and convenes – depending on 189-201 EC-T) in Strasbourg is the
the subject under discussion – with vary- only EU organ whose members are
ing contingents of members present, and elected directly by the citizens of the
is chaired by the presidency which member states. The EP has controlling
rotates at six-monthly intervals. rights over both the Commission and
The Council is based in Brussels the Council, is involved in the appoint-
and has its work prepared for it by its ment of the European Commission,
General Secretariat and by the has budgetary rights and participates
Committee of Permanent Represen- (again depending upon the political
tatives (CPR), which meets every week. field) in the legislative process of the
The Council’s internal voting proce- Community. But its greatest potential
dures vary depending on the policy influence relates to the co-decision pro-
field. Basically, there are unanimous cedure, where it occupies the role of a
votes and votes requiring a simple or a second chamber.
The 732 EP parliamentarians budgetary efficiency of the various

(Treaty of Nice) whose appointment organs.
lasts for one five-year legislative period, The Council of European Munici-
and each of whom belongs to an organ- palities and Regions (Articles 263-265
ised political party, reflect the diversity EC-T) and the Economic and Social
of the European political landscape. In Committee (Articles 257-262), which
the sixth electoral period of the EP, two- are made up of 350 representatives of
thirds of all delegates belonged to the the regional and municipal administra-
European Peoples’ Party with its tive authorities, and 350 representatives
Christian Democratic outlook and to of economic or social lobbies respec-
the Party of European Socialists. tively, give the Community two adviso-
The European Court of Justice ry bodies that have to be given compul-
(Articles 220-245 EC-T) in Luxem- sory hearings on specific political sub-
bourg consists of one judge per mem- jects, but whose statements have no
ber state. The judges are unanimously binding consequences for the legislative
appointed by governments of the mem- process.
ber states for a six-year period.
In its capacity as the highest Court REFERENCES:
of Appeal for all legal issues in the EU, WEIDENFELD, W./WESSELS, W. (ed)
the EuCJ, assisted by attorneys general, (2000), Europa von A-Z, Taschenbuch der
deals with law suits instituted by mem- Europäischen Integration, 7th edition, Bonn;
FRITZLER M./UNSER, G. (2001), Die
ber states or EU organs, disputes
Europäische Union, 2nd edition, Bonn; WES-
between governments of member states
SELS, (1999), Das politische System der
and EU institutions, as well as internal Europäischen Union, in: Ismayr, W. (ed),
conflicts in the EU. Die politischen Systeme WestEuropas, 2nd edi-
The courts of the member states tion, Opladen, pp. 713-745.
have to refer cases which concern EU
law to the EuCJ, which then through its Jürgen Mittag
decisions creates precedents for the Wolfgang Wessels
interpretation of European Law, and
which thus guarantees the consistent
interpretation and application of EU: Reforms and consolidation –
Community Law. economic aspects
The European Auditor General
(Articles 246-248 EC-T) with head- Since its establishment in 1958, the
quarters in Luxembourg, is responsible European Economic Community
for the lawful and proper handling of (EEC) has been attracting new mem-
the income and expenditure of the EU. bers (→EU: enlargement). At the same
Its members, which are appointed for time, the member countries have trans-
six years (one representative per mem- ferred more and more tasks to the com-
ber state), draw up the annual report mon European institutions. In this way,
and issue special reports and statements the EEC has grown from six founder
with which they monitor the finances members to a European Union (EU)
of the EU, and which demonstrate the embracing 27 countries with a common
212 EU: Reforms and consolidation – economic aspects
Chronological listing of expansions and of membership applications in the EU,

1961–May 2007
Application Response Start of End of Membership

from the negotiations negotiations
Commission
Great Britain 09.09.1961 08.11.1961 29.01.1963

10.05.1967 29.09.1967 30.06.1970 22.01.1972 01.01.1973
Denmark 10.08.1961
11.05.1967 29.09.1967 20.06.1970 22.01.1972 01.01.1973
Ireland 31.07.1961
11.05.1967 29.09.1967 20.06.1970 22.01.1972 01.01.1973
Norway 30.04.1963
21.07.1967 29.09.1967 30.06.1970 22.01.1972 –
Greece 12.06.1975 29.01.1976 27.07.1976 28.05.1979 01.01.1981
Portugal 28.03.1977 19.05.1978 17.10.1978 12.06.1985 01.01.1986
Spain 28.07.1977 29.11.1978 05.02.1979 12.06.1985 01.01.1986
Turkey 14.04.1987 14.12.1989 03.10.2005
13.10.1999
Austria 17.07.1989 01.08.1991 01.02.1993 12.04.1994 01.01.1995
Sweden 01.07.1991 31.07.1992 01.02.1993 12.04.1994 01.01.1995
Finland 18.03.1992 01.11.1992 01.02.1993 12.04.1994 01.01.1995
Norway 25.11.1992 24.03.1993 05.04.1993 12.04.1994 –
Switzerland 26.05.1992
Cyprus 04.07.1990 30.06.1993 30.03.1998 13.12.2002 01.05.2004
Hungary 31.03.1994 16.07.1997 30.03.1998 13.12.2002 01.05.2004
Poland 05.04.1994 16.07.1997 30.03.1998 13.12.2002 01.05.2004
Estonia 24.11.1995 16.07.1997 30.03.1998 13.12.2002 01.05.2004
Czech. Rep. 17.01.1996 16.07.1997 30.03.1998 13.12.2002 01.05.2004
Slovenia 10.06.1996 16.07.1997 30.03.1998 13.12.2002 01.05.2004
Malta 16.07.1990 30.06.1993 15.02.2000 13.12.2002 01.05.2004
Slovakia 22.06.1995 13.10.1999 15.02.2000 13.12.2002 01.05.2004
Latvia 13.10.1995 13.10.1999 15.02.2000 13.12.2002 01.05.2004
Lithuania 08.12.1995 13.10.1999 15.02.2000 13.12.2002 01.05.2004
Bulgaria 14.12.1995 13.10.1999 15.02.2000 15.06.2004 01.01.2007
Romania 22.06.1995 15.06.1997 15.02.2000 25.05.2005 01.01.2007
Croatia 21.02.2003 20.04.2004 04.10.2005
Macedonia 22.03.2004 17.12.2005
Source: Piazolo, D. (2001), The Integration Process between Eastern and Western Europe, Kieler Studien
310, Berlin; and supplemented by editors.
domestic market, a common currency ments by the EU to the poorer member

(→European Economic and Monetary countries in the context of the structur-
Union) and a common political process. al funds (→EU: regional and structural
Beyond that, additional countries have policy) are intended to stimulate growth
applied for membership (see table). in these countries and to accelerate the
During the 1999 Helsinki conven- equalisation of standards of living with-
tion of the European Council, Turkey in the EU.
was granted special candidate status, A uniform set of rules was created,
while membership negotiations have to which is binding for all member states.
be initiated on the basis of a This so-called acquis communautaire cov-
Commission report submitted to the ers:
European Council. In the referendums
of 1972 and 1994, Norway rejected the • the content, principles and political
membership conditions, and in 1992, goals of the treaties (including the
Switzerland suspended its membership treaties of Maastricht of 1992, Am-
application. sterdam of 1997 and Nice of 2000);
The large number of membership
applications reflects the economic • the legislation arising from the
attractiveness of the EU. The common treaties and the jurisdiction of the
domestic market, which guarantees the European Court of Justice;
freedom of movement of persons, cap-
ital, goods and services as well as the • the accepted statements and resolu-
freedom to establish an →enterprise, tions within the context of the EU;
makes the efficient allocation of the fac-
tors of production and effective →com- • the positions, explanations and deci-
petition possible within the EU. That sions in the context of the shared for-
contributes to increased prosperity in eign and security policies;
all member states.
But the associated structural • the positions, decisions and accepted
changes demand adjustment in the sec- conventions in the context of the
tors and areas concerned. In industries shared legal and domestic policies; and
that are no longer competitive this can
lead to job losses, while in growing • the international agreements of the
industries jobs will be created. The EU, as well as the agreements
movement of the factors of production, between the member states, which
labour and capital, favours a balanced were made with reference to special
labour market and a higher European EU activities.
economic output. The mass migration
of labour towards the Southern Despite the acquis communautaire’s
enlargement (Greece, Spain and daunting 80,000 pages, all new member
Portugal) which had been predicted in countries have to adopt the entire set of
some quarters did not occur, nor is it rules, so that the same rights and obli-
expected to occur even after the Eastern gations apply to all member countries.
enlargement of the EU. Transfer pay- Therefore, generally no digressions are
214 EU: Reforms and consolidation – political aspects
allowed; however, in particularly diffi- Eastern and Western Europe, Kieler Studien
cult areas, transition periods can be 310, Berlin, Heidelberg.
granted to new member countries
Daniel Piazolo
(environmental policy, agricultural pol-
icy, hygiene standards, the freedom to
establish a business and the right to
own land). But even long-standing EU: Reforms and consolidation –
members require transition periods, political aspects
e.g. regarding the freedom of move-
ment for workers (Germany and As a result of the considerable dynamics
Austria: 7 years). of the European process of integration,
Since certain aspects, rules and stan- the communal framework – originally
dards of the acquis communautaire do not developed in 1952 and then in 1958 for
correspond to the level of development six founder states and a very limited
of the new member countries and also number of political spheres – was sub-
of some of the poorer EU member ject to multiple changes. With the
countries, substantial costs and distor- Single European Act (1987), and the
tions result from the implementation treaties of Maastricht and Amsterdam
(e.g. from environmental protection regarding the European Union (1993
measures). and 1999) as well as the Treaty of Nice
This issue of the compatibility of an (2003), the original treaty system has
expanding EU (with countries with been comprehensively supplemented
increasingly dissimilar economic and adjusted.
power) and EU consolidation (deepen- The European Community devel-
ing) (since some countries support oped from a customs union to a domes-
more incisive shared regulations) tic market. Since the Maastricht Treaty,
requires reforms that go beyond the the organs and committees of the
resolutions of the Nice Treaty of Union occupy themselves (according
December 2000. The plan is to grant an to various different procedures, it is
extended EU sub-group of member true) with modern fields of political
countries the right to push the →inte- activity, such as environmental and con-
gration between the member countries sumer protection, as well as nearly all
of this group forward without automat- traditional responsibilities of the state,
ically expanding the acquis communau- i.e. internal and external security. The
taire in the process. regulation range and density of the
Community has likewise clearly in-
REFERENCES: creased.
CAESAR, R./HEINEMANN, F. (eds) But since the expansion of the polit-
(2001), EU-Osterweiterung und Finanzmärkte, ical spheres and responsibility alloca-
ZEW Wirtschftsanalysen 57, Baden-Baden;
tions referred to above did not go hand
LEACH, R. (2000), Europe – A Concise
in hand with adequate reform of the
Encyclopaedia of the European Union from
Aachen to Zollverein, Fitzroy Dearborn
Community organs, as envisaged in the
Publishers, London, Chicago; PIAZOLO, Treaty of Rome (1958), the EU – par-
D. (2001), The Integration Process between ticularly in view of the planned enlarge-
EU: Reforms and consolidation – political aspects 215
ment rounds regarding the Southern, a qualified majority and a simple major-
Central and Eastern European states – ity of the member states – on separate
is faced with considerable challenges. In request – still another quorum of 62%
order to give the union more depth and of the EU population is necessary
to achieve the ‘implementation of an (depending on the number of member
ever closer union of the peoples of states approximately 71% to 74% of the
Europe’ (Article 1 of the EU Treaty), votes). With this reform step the future
the Community felt the need – besides hurdle for majority decisions is made
the reform of political fields of central more difficult, since in a union which
importance (agricultural and structural has expanded to 27 member states nei-
policy) – to also investigate the func- ther the initial 15 EU members nor
tioning of the institutions (size and later on the 13 biggest or 22 smallest
composition of the Commission, bal- form a sufficient majority.
ance of votes in the Council, greater In contrast to the weighting in the
number of ballots with a qualified Council, the redistribution of seats in
majority). Parliament orients itself more strongly
The European Council in Berlin, guided by demographic standards.
with its Agenda 2000 which was adopt- Germany, representing about 17% of
ed in March 1999, had already intro- the population in a 27-member EU,
duced the reform of the Community’s would achieve a proportion of 13.5% of
→agricultural policy as well as measures the seats with a fixed number of 99
for economic and political cohesion. votes.
This was followed by the summit end- Considering the approximately 70
ing in December 2000 and the Treaty of Articles of the Community treaties
Nice, which aimed at creating the foun- which are subject to unanimity, the
dation for institutional reforms. expansion of majority decisions was
One of the main points of the also one of the quintessential points of
reform process of Nice was the new institutional reform. It has to be pre-
weighting of Council votes. Since with a vented, that in an enlarged Union with
view to future enlargement rounds the up to 27 member states the unanimity
less populated member states would be requirement in the Council leads to a
at an advantage in relation to the larger stalemate within the EU. With the
states, at worst decisions could have Treaty of Nice the sphere of majority
been taken with a qualified majority decisions was extended by a further 28
which would not even have had the points, but important political aspects
support of the simple majority of the which are dealt with at a European
entire population. Added to that was the level, for instance fiscal policy, are
threat of a strong distortion of the pop- invariably subject to the unanimity
ulation weightings of individual mem- requirement.
ber states. For this reason, in Nice, the Bearing in mind the sobering out-
votes were more spread out, now rang- come of Nice versus the positive exper-
ing from 29 (Germany) to 3 (Malta). iences derived from the Basic Rights
Three hurdles are envisaged. This Convention, the idea was promoted that
means that for a legal act, in addition to in order to achieve a more far-reaching
216 EU: Reforms and consolidation – political aspects
Vote distribution in the EU Council and the EU Parliament (EP) in terms of the Treaty
of Nice
Member Population EU-27 Council EU-27 EP EU-27

state in population votes1 Council seats2 EP
millions in % in % in %
Germany 82,5 17.02 29 8.41 99 13.52

France 59,8 12.33 29 8.41 72 9.84
Great Britain 59,2 12.21 29 8.41 72 9.84
Italy 57,6 11.88 29 8.41 72 9.84
Spain 41,9 8.64 27 7.83 50 6.83
Poland 38,2 7.88 27 7.83 50 6.83
The Netherlands 16,2 3.34 13 3.77 25 3.42
Greece 11,0 2.27 12 3.48 22 3.01
Portugal 10,4 2.15 12 3.48 22 3.01
Belgium 10,4 2.15 12 3.48 22 3.01
Czech Republic 10,2 2.10 12 3.48 20 2.73
Hungary 10,1 2.08 12 3.48 20 2.73
Sweden 9,0 1.86 10 2.90 18 2.46
Austria 8,1 1.67 10 2.90 17 2.32
Denmark 5,4 1.11 7 2.03 13 1.78
Slovakia 5,4 1.11 7 2.03 13 1.78
Finland 5,2 1.07 7 2.03 13 1.78
Ireland 4,0 0.83 7 2.03 12 1.64
Lithuania 3,5 0.72 7 2.03 12 1.64
Latvia 2,3 0.47 4 1.16 8 1.09
Slovenia 2,0 0.41 4 1.16 7 0.96
Estonia 1,4 0.29 4 1.16 6 0.82
Cyprus 0,7 0.14 4 1.16 6 0.82
Luxembourg 0,4 0.08 4 1.16 6 0.82
Malta 0,4 0.08 3 0.87 5 0.68
Total EU-25 455,3 321 (682)2
Romania 21,7 4.48 14 4.06 33 4.51

Bulgaria 7,8 1.61 10 2.90 17 2.32
Total3 EU-27 484,8 99.98 345 100.05 732 100.03
Source: Eurostat, European Parliament.
1 The vote distribution in the Council only came into force on 1 November 2004. Between 1 May and 31
October 2004, interim arrangements applied.
2 This distribution of seats was originally supposed to become effective after the European Parliamentary
Elections in 2004. Since Bulgaria and Romania join the EU in 2007 at the earliest, the seats reserved for
them were equally distributed among the other member states, so that the European Parliament already
had the maximum number of 732 members.
3 Deviation from 100% due to rounding off.

EU reform, a convention, meeting pub- proposal was eventually accepted in the

licly, should be formed. Between summer of 2004 when the European
February 2002 and June 2003, based on Council had an Irish president, and it
the Laeken Declaration and chaired by was submitted to the member states for
President Valéry Giscard d’Estaing, a ratification. Ratification was denied by
committee of 105 delegates convened voters in France and the Netherlands.
which was made up of representatives However, in 2007 new steps have been
from all the existing and prospective taken to deal with these matters in a
member states, the EU institutions and governments’ conference.
the national parliaments. It was their
intention, as an alternative to a heads of REFERENCES:
state or government conference, to WEIDENFELD, W. (ed) (2002), Europa-

come up with an answer to the ‘critical Handbuch, Gütersloh; GIERING, C. (edi-
tor) (2003), Der EU-Reformkonvent - Analyse
questions’ concerning the ‘future devel-
und Dokumentation, Gütersloh, Munich.
opment of the Union’.
The convention ratified a draft Jürgen Mittag
‘Agreement on a European Constitu- Wolfgang Wessels
tion’, offering numerous options which
could improve the union’s institutions’
ability to act. Reform proposals were
submitted, particularly on the subjects EU: Regional and structural
of defining the competencies of the dif- policy
ferent levels (EU, member states, fed-
eral states/ regions, etc.), the role of the The →European Union is characterised
national parliaments in the integration by considerable internal economic and
process and the simplification of the social differences. In 1998, the average
treaties. Concerning the most crucial per capita →income in the EU’s poorest
issue, which is the voting method in the region (Ipeiros in Greece), was only
Council of Ministers (Council of the 42% of the EU average, while the aver-
EU), the convention advocated the age income in the most affluent region
double majority principle. This would (Central London) amounted to 243%
mean that from 2009 onwards, the of the EU average (see figure, next page).
Council’s qualified majority decisions The income differential at national
would require both a majority vote level among the member states is slight-
from the member states (50%) as well ly less steep, but it nevertheless ranges
as a majority vote from the EU popula- from 66% in Greece to 176% in
tion (60%). Luxembourg.
However, since the December 2003 Differences in terms of →unemploy-
governments’ conference could not ment are also marked. In 1999, regional
agree on the double majority principle, unemployment ratios ranged from
the convention’s draft comprehensive 2.1% in the Aland Isles in Finland, to
constitutional proposal also failed. But 28.7% in Calabria in Italy. The national
due to changed (party-) political affilia- unemployment ratios measured
tions among the EU member states, the between 2.4% in Luxembourg and
218 EU: Regional and structural policy
Comparative prosperity in the European Union

Gross domestic product in purchasing power standards (PPS) per inhabitant
16.1% in Spain. The reduction of these along the lines of financial equalisation
differences is the most frequently cited in Germany was politically impossible
reason for the existence of European in the EU. This is why the EU desig-
regional and structural policies (RSP). nated different types of ‘problem
The basic structure of the EU RSP regions’, which are developmentally
was established in the late 1980s. At that assisted by the RSP. After some amend-
time, especially the less affluent EU ments were made to these so-called
member states wanted to see the EU RSP ‘objectives’, they have been
domestic market grow by making the detailed as follows for the period of
economically backward regions of the 2000–2006:
EU more competitive. This is achieved
above all through investment in the • Objective 1: Developmentally back-
areas of infrastructure and human capi- ward regions (defined as average per
tal, as well as through encouraging pri- capita income of less than 75% of the
vate investment. EU average). These regions are in-
The direct redistribution of finan- habited by about 22% of the total EU
cial resources among the member states population, especially in Greece,
Portugal, Spain, Italy and the former the other hand, the RSP can only have
GDR. About 70% of the RSP budget a positive effect if basic economic con-
is used for this objective. ditions such as →price level stability and
an appropriate tax burden have already
• Objective 2: The regions which are been put in place.
particularly affected by economic and But it has to be noted that RSP
social changes (e.g. out-dated indus- funding tends to be spread too broadly,
trial regions and rural areas with with the result that its effectiveness is
downmarket economic develop- reduced. The furthering of human cap-
ment). About 18% of the EU popula- ital, for example, in relatively prosper-
tion live in such regions and about ous EU regions through Objective 3 of
12% of total funds flow to Objective the EU RSP is economically barely jus-
2 regions, which is a significantly tifiable. In terms of the subsidiarity
smaller per capita percentage than principle, the EU RSP is generally only
Objective 1 regions. supposed to be implemented when a
member state is not able to solve its
• Objective 3: Assistance with the adjust- structural problems on its own.
ment and modernisation of the edu- From a political perspective, howev-
cation, vocational training and er, it is in the interest of the ‘rich’ mem-
employment policies and systems. ber states to secure RSP funds for their
This assistance, which adds up to own benefit through instruments like
12% of the RSP total funds, may be Objective 3.
granted to any region which is not Then there is the problem that the
classified as Objective 1. The detailed coordination between EU RSPs and
regional allocation of funds has large- other policy areas is often inadequate.
ly been left up to the EU member This means that there is a risk that the
countries themselves. concentration of national and European
funds for research and development in
Beyond that, a number of quantita- the economically strongest regions in
tively less significant measures have the EU will reinforce the very econom-
been put in place in the context of the ic differences inside the EU which were
EU RSP; for example, the promotion of described earlier (→EU: industrial,
cross-border cooperation. The total research and technology policy).
cost of the financial measures planned In conclusion it can be stated that
for 15 member countries for 2000–2006 →EU enlargement represents a consider-
had been estimated to be about s213 able challenge for the RSP. Since the
billion (at 1999 prices). average per capita income of most of
Since the early 1990s, the EU RSP the new member countries lies
has effectively supported the economic markedly below average of the older
progress of at least some of the targeted members, the Eastern enlargement is
regions. Compared with the EU aver- leading to a significant increase in
age in the 1990s, the per capita income Objective 1 regions. This in turn will
in Spain, Portugal and Ireland, for either necessitate a considerable
example, has increased markedly. On increase of the funding set aside for
220 EU: Social policy
RSP in the budget, or a reduction of the Thus, economic reasons were deci-
assistance allocated to the current sive here as well. While equal pay was
member states. intended to counteract competition dis-
tortions, the social protection of
REFERENCES: migrant workers formed a significant
EUROPÄISCHE KOMMISSION (2001), prerequisite for the free exchange of
Zweiter Bericht über den wirtschaftlichen und goods, labour, services and capital in the
sozialen Zusammenhalt, Brussels; Further
sense of the ‘four basic liberties’. Both
documentation is available at: http://www.
principles commonly attempt to coun-
europa.eu.int/comm/dgs/regional_policy/index_de.
htm; MAIER, G./ TOEDTLING, F. (1996),
teract possible discrimination based on
Regionalökonomik und Stadtökonomik Vol. 2 – nationality and/or gender.
Regionalentwicklung und Regionalpolitik, In particular, numerous decisions of
Vienna. the European Court of Justice illustrate
that the non-discrimination principle
Reiner Martin enjoys a broad legal interpretation with
high practice-oriented relevance, par-
ticularly since an individual member of
EU: Social policy a European Union (EU) member state
is able to bring charges of discrimina-
The European Community (EC) was tion. With the Single European Act of
originally established as an economic 1987, the protection of workers’ health
community and was understood to be a and safety (Article 118a, now Article
project through which the political 137 EC Treaty) has become a third col-
integration of Europe could be achieved umn of Community →social policy.
using economic means. In contrast, Since then, Community-wide regu-
socio-political questions such as a lations that outline the minimum pro-
Europe-wide adjustment of the social visions for the organisation of working
security systems have played only a sub- conditions with regard to the protection
ordinated role. The refusal to adopt of the safety and health of the employ-
comprehensive social harmonisation ees can be issued. In contrast, the regu-
has led to the fact that the presence of lation regarding the ‘harmonisation of
the ‘social dimension’ of the Com- social systems’ postulated in Article 136
munity can be seen only in specific reg- of the EC Treaty has enjoyed much less
ulations. concrete realisation. It expresses a
The socio-politically relevant rather vague expectation that with
European Community Law has its increasing economic integration, the
roots in the principles of equal treat- general living and working conditions
ment of males and females regarding within the Community will be har-
pay (Article 119), as well as in the monised. Concrete action, however,
creation of employee freedom with remains within the authority of individ-
regard to the area of social security ual member states.
(Article 51), which is anchored in the Only with the forthcoming realisa-
1957 treaty establishing the European tion of the internal market at the begin-
Economic Community. ning of the 1990s was the dimension of
EU: Social policy 221
the social Community put on the agen- states. As the socio-political strategy
da, since the states with high labour and plan of the European Commission
social costs feared a destabilisation of from 1998–2000 already suggested, the
their competitive positions. emphasis lay – in view of the
With the 1989 adoption of the Community-wide high rate of →unem-
Charter of Fundamental Social Rights ployment – on employment policy (and
and the treaty establishing the EU not on the social protection policies).
(Maastricht Treaty, 1 November 1993), Standardisation in the direction of a
the ‘agreement on social policy’ conceptually harmonious European
received a legal advancement – in the social policy is, for reasons of different
same way as the principle of majority historical development as well as politi-
was allowed with regard to the labour cal and cultural conditions, unlikely to
and social Community legislation for come to fruition in the foreseeable
the 14 signatory nations (without the future. This is especially so when one
United Kingdom). considers institutionally important
At the same time, a ‘two track’ areas such as social security, dismissal
Europe was created, at least as far as protection and autonomy in bargaining,
social policy is concerned, by having as well as the active labour policy par-
regulations that need not apply to the ticipation that remains subject to the
United Kingdom. The benefit is that principle of unanimity – and thus sub-
nations of lesser economic power can ject to the authority of the individual
gradually harmonise with regard to eco- nations.
nomic and social convergence, while In future, European social policy is
more advanced nations need not lower likely to seek individual measures for
their levels of efficiency. harmonisation within the areas of pen-
Thanks to the ‘social dialogue’, a sion, health, nursing care and unem-
further innovation was generated. This ployment so that these areas do not go
was the right to hearings and to propose counter to economic integration. The
or nominate on behalf of the unions primacy of economics over social policy
and management vis-à-vis the European would thus remain.
Commission.
If the social partners agree on regu- REFERENCES:
lations autonomously on a Communi- KOWALSKY, W. (1999), Europäische

ty-wide level, these are then converted Sozialpolitik. Ausgangsbedingungen, Antriebs-
kräfte und Entwicklungspotentiale, Opladen;
into European law. This has, however,
SCHMÄHL, W./ RISCHE, H. (Ed.),
hardly been the case. The few excep-
(1997), Europäische Sozialpolitik, Baden-
tions have included the formation of Baden; PLATZER, H.-W. (Ed.) (1997),
European works councils (→industrial Sozialstaatliche Entwicklungen in Europa und
relations constitution). die Sozialpolitik der Europäischen Union. Die
It was only with the participation of soziale Dimension im EU-Reformprozeß,
the United Kingdom in the social Baden-Baden.
agreement in 1997 that the basis for a
unified and comprehensive European Hans Jürgen Rösner
social policy was created for all member
222 EU: Trade policy
EU: Trade policy which the Council empowers the

Commission (Article 133 EC Treaty).
Customs unions such as the European The EU trade policy has accepted
Union were authorised by the General the empirically proven fact that division
Agreement on Tariffs and Trade of labour and open markets are the best
(GATT) and in the World Trade way of creating →income and →employ-
Organization (WTO) (→international ment, while at the same time increasing
organisations) because it is assumed that the standard of living. Through open,
to phase out trade barriers between the competitive markets, productivity gains
member countries without at the same can be achieved that would otherwise
time erecting more customs barriers for not be possible. This connection is not
third countries, would bring about an always obvious, because the ‘creative
opening of national markets worldwide. destruction’ associated with competi-
At the same time, GATT/WTO expects tion – meaning the progression to more
member states to get actively involved demanding products and activities –
in the liberalisation of the global econo- results in job losses in those branches
my. which are no longer able to compete.
In 1958, the European Economic Economic policy is supposed to react to
Community (EEC) expressed the this by widely promoting education and
theme of its trade policy (Article 110, further training and by, if necessary,
EEC contract) as follows: ‘The creation offering the ‘victims’ of progress tem-
of a customs union reflects the desire of porary support (→unemployment: social
the member states to contribute to the security).
gradual removal of the limitations to As the largest exporter of goods and
international trade and to phase out services, the EU is clearly interested in
customs barriers, in the interests of all gaining access to foreign markets. In
parties involved and for the promotion addition, it is increasingly recognised
of a harmonious development of world that opening its own market yields
trade.’ higher prosperity and employment
This objective has remained gains than the removal of trade barriers
unchanged and was, as Article 131, on the part of the trading partners.
incorporated into the EU Treaty of Trade barriers, whether practised at
Maastricht/Amsterdam. It was rein- home or abroad (protectionism), will
forced by the maxim that the not prevent transformation but will
Community respects the principle of an only delay it at enormous cost.
‘open market economy on the basis of Starting in 1985, the rules of com-
free →competition’ (Articles 4, 98, 105, petition in an open market were imple-
EC Treaty). mented with particular consistency and
In 1970, trade policy was transferred success in the EU, concurrently with
from the member states to the the Domestic Market Programme. The
Community. The European Com- introduction of freedom of movement
mission submits proposals to the for goods, services, labour and capital
Council of Ministers for the imple- (four types of freedom), invigorated
mentation of a common trade policy, to internal European trade and resulted in
EU: Trade policy 223
lasting, positive effects on income and access have a positive effect, the same
employment in all EU member states. must apply in the global market – about
Consumers and →entrepreneurs can one-fifth of which is represented by the
choose from a greater variety of prod- EU. This means that the more the EU
ucts at lower prices, which increases opens its external borders with third
buying power. The costs of travel, countries, the more it will benefit in
goods, transport and communication of terms of income and employment. For
information and news have gone down most industrial goods this realisation
dramatically. Today, both European and has resulted in openness of the Euro-
non-European suppliers can sell their pean market, which with average cus-
merchandise in any EU country under toms duties of 2.4% must be seen as
the same legal conditions. exemplary.
Service providers, by contrast, The politically motivated considera-
remained subject to certain limitations, tion of specific interests is, however,
which is why at the beginning of 2001 causing the EU to continually make
the European Commission started exceptions despite its better knowledge.
implementing a package of steps At the instigation of just a few EU
intended to promote the integration of member countries, the European
the European service markets. import of textiles and clothing stands
By the end of 2002, any obstacles to out through its quantity limitations and
the transnational exchange of services high customs duties. This harms not
were supposed to have been identified only buyers in Europe but many devel-
and eliminated as far as possible, so that oping countries which depend on the
service providers can just as well con- export of these products. These devel-
duct their activities in the whole of the oping countries are deprived of the pos-
EU or in just one member country. For sibility of sales opportunities in the
the users of services, be they companies context of the international division of
or consumers, this means, as it does for labour. They are also deprived of the
goods, a larger number of suppliers opportunity of taking responsibility for
who are not only competing with each their own progress.
other but who are also competing in Another example of the lack of con-
terms of quality and innovation, there- sistency in EU trade policy is the cus-
by benefiting the consumer. As the toms duty of 10% on imported cars,
freedom of services in Europe is which from the macroeconomic per-
realised more consistently, the transi- spective is an unjustifiable interference
tion from the industrial to the service in the market process (US: 2.5%). The
and information society is sped up. If import limitations and subsidies for the
the same proportion of the workforce benefit of the coal mining industry
were employed in the services sector as (about s100 per ton) is another exam-
in the United States, there would be an ple which shows up the problems and
additional 36 million jobs in the EU. costs of protectionism.
If in the European domestic market In addition, the European agricul-
the principles of competition, division tural policy is increasingly becoming an
of labour and unhampered market economic nuisance, both inside and
224 EU: Transport policy
outside the EU. The policy’s one-sided are not very concrete and are limited to
focus on protecting European produc- the rail, road and internal waterways.
tion, which by international standards is The cause of the impreciseness was
uneconomical, puts an extra burden on the substantial difference in viewpoints
EU consumers and taxpayers. At the regarding the conceptual organisation
same time, as in the textile sector, many of the →transport policy. While the EEC
developing countries are deprived of Commission at that time, as well as
market access to the European con- some of the smaller member countries,
sumers and their buying power. demanded a competitive regulatory
→Deregulation and the opening of framework, Germany, France and Italy
the agricultural markets will be difficult oriented themselves along the lines of
and sensitive topics at future interna- the ‘particularities of transport’ theory.
tional talks under the umbrella of the According to these teachings, the area
WTO. There, the EU will have to sub- of transport is an exception where the
mit to being judged by its own princi- principles of market competition do not
ples of conduct in a market economy. apply. This anti-competition perspec-
tive has been anchored in the EC Treaty
REFERENCES: (Article 75 (1)).
EUROPEAN COMMISSION (March Despite many initiatives on behalf
2001), Single Market News; WORLD of the European Commission in favour
TRADE ORGANIZATION (July 2000),
of a liberalisation of market access and a
Trade Policy Reviews, European Union,
gradual dismantling of national inter-
http://www.wto.org.
ference with transport tariffs, as well as
Detlef Böhle coordinated frameworks for →competi-
tion within and between the transport
carriers in Europe, almost every attempt
to create a structured European trans-
EU: Transport policy port policy was condemned to failure.
It was only with the European
The 1957 treaty establishing the Parliament’s claim to the European
European Economic Community Court of Justice (EuCJ) regarding the
(EEC) already contained statements EU Council’s failing to act and its poli-
about a common transport policy: cy of procrastination, and the EuCJ’s
Article 3 in general form, Articles 47-87 subsequent decision to extend free
more concretely regarding common movement of cross-border services to
rules. This policy concerns, among transport from 22 May 1985, that a
other things, issues of transnational change in common transport policy
traffic, rights of passage for transport became visible. The EuCJ found
enterprises in a member state in which against the quantitative restrictions, but
they do not reside, road safety and the did not give clear criteria for the estab-
elimination of discrimination. This lishment of a new policy.
concerns Community agencies as well The mostly positive experience with
as transnational transport between the already liberalised transport markets
member states. The terms of reference and the massive academic critique on
EU: Transport policy 225
the ‘particularities of transport’ theory, traffic congestion. Further, by introduc-

motivated the government heads to ing uniform technical standards, it is
create a free European transport market trying to create internationally har-
without quantitative restrictions in the monised control systems within the
same year, until 1 January 1993. realm of air traffic control and coordi-
The subsequent liberalisation nated transport route planning with
efforts applied first and foremost to the regard to trans-European transport net-
road transport of goods. Partly with the works. These should allow both eco-
support of the member states, and part- nomical and smooth flowing traffic.
ly against their substantial resistance, Finally, in the light of →EU enlargement
the mandatory margin tariffs were the Commission is striving to liberalise
somewhat abolished and free price for- transport relations with the new mem-
mation in transnational transport was ber countries – and to lead them to a
implemented. The Community licence common transport market.
took the place of the quantitatively fixed Despite the focus on a stronger
transport authorisation, which made it market competition orientation,
possible to transport goods within the European transport policy still faces
EU without restrictions. It also elimi- substantial policy planning tasks. Thus,
nated the restriction on cabotage that the member states have a range of pos-
prohibited enterprises from performing sibilities for action within the frame-
transport services in another member work of the principle of subsidiarity
state. that allows them to avoid the desired
Gradually, the liberalisation spread competition by massive market inter-
to other facets of transport, although in ference.
varying degrees: the liberalisation of On the other hand, where the
tariffs and market access regarding air Community has the appropriate com-
traffic between the member states petencies, no adequate realisation of the
meant that market access within the Community law has occurred. Short-
member states was also liberalised. At distance public transport is, therefore,
the same time, the navigation of nation- despite the demand for more competi-
al inland waterways was opened to all tion through tendering procedures, still
enterprises. With regard to the rail sys- a closed market to which private ven-
tem, the EU requires separate calcula- dors have only very limited access.
tions for the rail network and the train Most often in regard to air transport
operation, as well as the discrimination- and sea ports, the general prohibition of
free access to the national networks for competition-inhibiting aid →subsidies is
all railway operators – public or private. circumvented by the issue of special
With its more recent activities, the exemptions or violations. Rail trans-
EU Commission has aimed for a fairer port, too, has not been able to eliminate
allocation of transport-dependent costs the state’s influence on the rail net-
to their respective initiators, regarding works in many countries, thus making
the costs for the use of the transport access to rail networks sometimes
routes (route costs), environmental impossible for newcomers.
costs as well as the costs that arise from
226 Family policy
REFERENCES: income, child and childcare allowances)

EWERS, H.-J./ STACKELBERG, F. v. and social transfers, such as child bene-
(1998), Verkehrspolitik, in: Klemmer, P. fit, educational aid and aid for the pro-
(ed), Handbuch der Europäischen Wirtschaft-
tection of the unborn child. Since ‘fam-
spolitik, Munich, pp. 1152-1192; HART-
ily expenditure compensation’ was
WIG, K.-H. (1999), Marktwirtschaftliche
Optionen der Verkehrspolitik in Europa, in:
renamed in 1996 as ‘family contribu-
Apolte, Th./ Caspers, R./ Welfens, P. J. J. tion compensation’, it has become pos-
(eds), Standortwettbewerb, wirtschaftspolitische sible to claim either child benefit or a
Rationalität und internationale Ordnungspolitik, tax rebate.
Baden-Baden, pp. 89-112. Time spent on childcare and educa-
tion is recognised and taken into
Karl-Hans Hartwig account in the calculation of old-age
pensions and pension plans for widows
and widowers. The child allowance fea-
Family policy tured in Germany’s latest pension
reform plan has added more provision
The term ‘family’ is rooted in civil law for retirement, covered by capital
and defined as parents living with their resources. All this supports and pro-
children in one household, while the motes parenting. The situation con-
parents may or may not be married to cerning the legally prescribed national
each other, may never have been mar- →health insurance where dependants
ried or may have single status. This have free cover, and also concerning the
means that marriage is no longer a pre- additional child allowance for the
requisite for the existence of a family, unemployed in the social security sec-
which instead now means the sole or tor (→unemployment: social security), is
shared custody for one or several chil- similar. Besides these purely material
dren. contributions, aid in support of the
Family policy in Germany is there- cohesion and educational effectiveness
fore understood as all those protective of families through marriage, parenting
and supportive measures that are aimed and educational counselling as well as
either directly at the children or indi- family planning must be mentioned.
rectly at their parents. Just as the new term ‘family contri-
The protective measures provided bution compensation’ makes clear, chil-
by the law start with protection for the dren do not represent a burden on soci-
unborn child and protection of the ety, but parents through the investment
mother, as well as the legal right to of money and labour are making an
claim maternity leave and part-time essential contribution for the continued
employment. The measures continue existence of society. It is therefore the
with child support and support for ado- joint task of the federal government and
lescents, protection of the youth and the states at government level, and that
employment protection legislation. of the municipalities at local level, to
Where supportive measures are build a society which favours the child
concerned, one has to distinguish and the family. Besides the provision of
between tax relief (tax split of family affordable living space – which must be
tailored to the needs of children and Federal Cartel Office

ought to be located in child-friendly
surroundings with a family-focused The Federal Cartel Office (FCO) is the
socio-cultural infrastructure – a satis- most important German competition
factory range of supportive and comple- authority. As an independent federal
mentary facilities which assist the fami- authority, it falls under the Federal
ly in the care, education and training of Ministry of Economics and Technology.
their children should also be available, In terms of the relocation programme,
together with health-promoting meas- its headquarters were transferred from
ures and institutions. Berlin to Bonn. The FCO is primarily
The most important task family pol- responsible for the implementation of
icy-makers have to tackle in the future the →Act Against Restraints of Competition
seems to be, on the one hand, the which came into force on 1 January
creation of conditions which favour the 1958 as a competition watch-dog. The
combination of parenting with gainful FCO has a staff of about 300 employees
employment, particularly for single and officials, of whom about 150 are at
parents; and, on the other hand, ensur- executive level – almost exclusively
ing that domestic activities receive lawyers and economists, in approxi-
more general respect. mately equal numbers.
Decisions regarding mergers (amal-
REFERENCES: gamations), monopolies and abuse of
MÜLLER-HEINE, K. (1999), Ziele und market power are taken by the 11 deci-
Begründungen von Familienpolitik, in: sion-making divisions of the FCO, each
Arbeit und Sozialpolitik, Parts 9-10; WIN-
of which is responsible for certain
GEN, M. (1997), Familienpolitik. Grundla-
industries.
gen und aktuelle Probleme, Stuttgart; LAM-
PERT, H. (1996), Priorität für die Familie.
A decision on each case is made by a
Plädoyer für eine rationale Familienpolitik. committee consisting of the director of
Berlin. the division concerned and two associ-
ate members of the same division. In
Hans Jürgen Rösner this capacity, the decision divisions are
Mergers in Germany, 1973–2004

Organisation chart as of 1 April 2007 Organisational chart of the Federal Cartel Office
Postal address
228
Kaiser-Friedrich-Str. 16
Responsibilities of Decision Divisions:
L1 53 113 Bonn
All decisions in administrative and
Telephone: 49-228-9499-0
administrative fine cases; LP
PRESIDENT Telefax: 49-228-9499-400
Participation in proceedings of the PRESS OFFICE
IVBB: 01888 7111-0
supreme Land authorities
email: poststelle@bundeskartellamt.bund.e
Only informal contacts are possible via e-mail.
L2 P Please read the information provided on our
website http://www.bundeskartellamt.de
VICE-PRESIDENT Litigation and General
Z1 Z2
Legal Matters G ECON
Federal Cartel Office
Administration Information department General Competition Project Group Economic

Law Issues Concepts
VK1 VK2 VK3 G1 G2 ext 230 G3 G4 E/G5 ext 240 SKK ext 386
1st Public 2nd Public 3rd Public German and European General Economic German and International Special Unit for
Procurement Procurement Procurement Antitrust Law Policy Public European Merger Competition Combating Cartels
Matters
Tribunal Review Tribunal Review Tribunal Review __________________ Relations Control
Procedures Procedures Procedures
ECN Coordination Unit
B1 B2 B3 B4 B5 B6 B7 B8 B9 B10 B11
1st Decision 2nd Decision 3rd Decision 4th Decision 5th Decision 6th Decision 7th Decision 8th Decision 9th Decision 10th Decision 11th Decision
Division Division Division Division Division Division Division Division Division Division Division
Extraction of iron Agriculture and Health sector Waste Mechanical and Media Telecommuni- Gas Wholesale and Prosecution of
ore and non- forestry (incl. medical management plant engineering cations retail trade in administrative
metallic minerals technology, industry Culture, sports, Electricity consumer goods offences in
Wood products pharmacy, health Metal industry entertainment Broadcast conjunction with
Construction insurance and Financial services engineering Mineral oil Tourism and hotel violations of Sec 1
industry and relat- Food industry hospitals) Iron and steel Advertising catering industry ARC and Art. 81
ed services (build- Other services industry EDP District heating EC
ing materials, Textile industry Chemical industry Electrotechnology Transport
glass, ceramics) Trade fairs Coal mining
Other consumer Measurement and Postal services
Real estate and goods control technology Paper industry Water
related service
Automotive Patents and
Wood industry industry (incl. rail, licences
(excl. furniture air and water
production) vehicles)
not subject to any directives but make Federal Employment Agency

autonomous decisions.
Concurrently with the sixth amend- The German Federal Employment
ment to the Act Against Restraints of Agency (FEA) is an officially registered
Competition which came into force on autonomous body with legal capacity
1 January 1999, two additional federal and directly answerable to the federal
public procurement divisions were government. Autonomous organs
established at the FCO. The public pro- (through the employees, employers and
curement divisions are responsible for the public bodies) are the Executive
the examination of the placing of public Committee and Board of Governors as
orders in the area of federal govern- well as the administrative committees
ment responsibility. of the state employment offices and
The FCO follows up on all employment agencies. According to
restraints of competition which are the Social Security Code III (from 16
effective in Germany. Some of its spe- December 1997), the FEA is the regula-
cific functions include enforcement of tory body responsible for ‘employment
cartel prohibition, the monitoring of promotion’.
abuse and merger control (→concentra- Historically, the FEA, founded on 1
tion). But the FCO is responsible for May 1952, takes the place of the
the enforcement of cartel prohibition German Reich Institute for Labour and
and the monitoring of abuse of power Unemployment Insurance, established
only when the restriction of competi- on 1 October 1927 and after the
tion extends beyond the borders of a National Socialist ‘synchronisation’,
German federal state. If the effect is based on the Employment Creation
limited to a state, the respective region- and Unemployment Insurance Act of
al competition authorities follow up on 16 July 1927, which had closed a gap in
the alleged competition offences. Bismarck’s social security legislation.
Merger control, however, is exclusively At the beginning of 2002 the federal
dealt with by the FCO. government introduced a commission
In its capacity as the competent for ‘modern services in the job market’,
authority, the FCO also attends to all the so-called Hartz Commission. Its
matters which have been transferred to task was to make the German job mar-
the member states in terms of the com- ket more effective and labour adminis-
petition regulations of the European tration more efficient. On the basis of
Economic Community Treaty. Finally, the proposals made by the Hartz
on the basis of its practical experiences Commission, four laws concerning
the FCO makes official statements on modern services in the job market
matters regarding the political and legal (Hartz I-IV) were ratified. As part of a
aspects of competition. reform process, the Federal Labour
Office was renamed the Federal Em-
REFERENCES: ployment Agency on 1 January 2004.
Internet: www.bundeskartellamt.de As long ago as the 19th century,
municipal labour offices had sprung up
Kurt Stockmann
especially in the big cities. Growing
230 Federal Employment Agency
mass unemployment during the sents a crucial security for the liveli-
Weimar period in the wake of the special hood of the majority of workers. Private
labour requirements of a war economy insurance against the risk of unemploy-
and the emergence of a variety of insti- ment is not on the cards due to the col-
tutions for labour registration and lective interconnections of losses in the
unemployment support made it obvious event of economic, structural and
that a comprehensive, neutral and ef- growth crises. Besides, the fact that the
ficient labour organisation was needed. individual can have an impact on the
Linking a public labour service with risk of unemployment (‘moral hazard’)
income protection in the event of means that it is a risk which cannot be
→unemployment can be regarded as a privately insured.
first step in a preventative (prophylac- There is no uniform total labour
tic) →social policy in relation to the risk market. Rather, it is divided into spe-
of unemployment. The Employment cialised technical, qualification-based,
Promotion Act of 1969 and its amend- industry-based and regional labour
ment of 1997 (Social Security Code III) markets. The labour market is charac-
had reinforced the emphasis on finding terised by a particular lack of trans-
work, preserving employability and the parency of supply and demand. Work
integration into regular gainful employ- contracts are incomplete and the mobil-
ment through the expansion and ity of workers is limited. These condi-
systematic development of the sophisti- tions make it as difficult to bring about
cated methods of an active →labour mar- the smooth interlocking of →supply and
ket policy. demand in the labour market as it is to
In view of the specific imperfections steer the resource ‘labour’, both at indi-
of the job market, such institutional vidual and macroeconomic levels,
arrangements for gainful employment towards optimal allocation from which
(institutionalised job market) can, in high economic yields can be obtained
economic theory, be seen as a path to through employment, in quantity and
greater prosperity. quality terms.
The founding fathers of the →social With the help of information about
market economy, in their desire to over- the state and development of the labour
come the historical problems of the market through vocational guidance
‘worker question’, had made the defeat and the finding and allocating of jobs as
of unemployment the central issue of well as through the speedy occupation
their economic policy (Ludwig of open places, the FEA can support
→Erhard, Alfred →Müller-Armack and equilibrium in the labour market
Walter →Eucken). The FEA can there- (Social Security Code III, section 1). By
fore be regarded as an indispensable offering this service, the FEA creates an
element of the systematic order of the important opportunity for employers
job market in the social market econo- and employees to become aware of
my (→labour market order). their special responsibility for the
Despite the improved situation of development and preservation of oper-
workers in Germany in the decades ational efficiency and for employment
since the 1950s, earned income repre- (Social Security Code III, section 2).
Despite the abolition of the former ment promotion. Furthermore, it de-

labour office monopoly (allocation monstrated that the labour market pol-
monopoly), the FEA, even in a phase of icy of the FEA can be effective only in
increasing internet job websites, is the combination with a macroeconomic
only comprehensively competent, growth and →employment policy (see sec-
neutral, available and decentralised tion 1 Employment Promotion Act and
institution of its kind; it has 10 regional Social Security Code III, section 1).
managements, 180 employment agen- Although this is not always taken into
cies and 660 offices. The FEA is the account, the restrictions of active labour
officially appointed service provider market policies, particularly of job cre-
(public employment service) for all ation, were felt during the fight against
labour questions relating to →vocational mass unemployment in the transforma-
training and further education, mobility, tion and adjustment process of East
occupation and self-employment. Germany.
The granting of wage compensa- For the assessment of job creation
tions in the case of unemployment measures (in the presence of high
(unemployment pay, maintenance unemployment and lacking demand for
money, unemployment relief) depends labour), general legal principles and
on a justified contribution-based claim, regulations concerning the administra-
and in principle depends on the previ- tion of a welfare state are significant.
ously earned income. The level and Labour market relief, the preservation
duration of claims (as well as their ces- of job qualifications and employability
sation when a new job is started) are through educational measures and
often seen, by international compari- development contributions for the
son, as being one of the causes of per- regional infrastructure, as well as bridg-
sistently high unemployment. ing functions for long-standing job-
In order to be able to offer success- seekers and others who have difficulties
ful services for employees and employ- finding work, play an important politi-
ers and the preservation of employabil- cal role.
ity through preventative job promotion,
the FEA requires scientific analyses of REFERENCES:
the labour market and employment; LAMPERT, H. (1997), Die Wirtschafts- und
these are compiled by the FEA’s Sozialordnung der Bundesrepublik Deutschland,
13th edition, Munich/ Landsberg a. Lech;
Institute for Labour Market and Occu-
ROTTENECKER, H./SCHNEIDER, J.
pation Research (Social Security Code
(1996), Geschichte der Arbeitsverwaltung
III, section 282). in Deutschland, in: Siebrecht/Kohl/ Streich,
Besides ongoing monitoring of the Aufgaben und Praxis der Bundesanstalt für
implementation of business policy Arbeit, 9; KLEINHENZ, G. (1979),
goals, labour market policy instruments Verfassung und Struktur der Arbeitsmärkte
are subjected to a constant outcome in marktwirtschaftlichen Systemen, in:
analysis. More than once, an analysis of Lampert, H. (ed), Arbeitsmarktpolitik,
the active labour policy has led to mod- Stuttgart, New York, pp. 8ff.
ifications and improvements of the
effectiveness and efficiency of employ- Gerhard D. Kleinhenz
232 Federal Republic (Bund), federal states (Länder), municipalities
Federal Republic (Bund), federal beyond that will the next level authori-
states (Länder), municipalities ty be responsible.
It follows that the Basic Law, which
In a multilevel state, the competencies is committed to federalism, tends to
for public tasks, expenditures and assign the execution of sovereign pow-
incomes must be regulated between the ers and the fulfilment of public tasks –
different levels. Regarding the task dis- including legislative competence – to
tribution, two fundamental models are the states. First of all, and not in line
applicable: for a central solution the with this, to deal with certain central
tasks are preferably assigned to the affairs (e.g. national defence), the Bund
super-ordinate level. The advantages of has been invested with exclusive legisla-
such a system are seen particularly in tive powers. Second, the Bund also has
greater administrative efficiency, since concurrent legislative powers, where
thanks to the bundling of competencies the provision of equal living conditions
for the purpose of national task fulfil- for all citizens or the preservation of
ment, costs can usually be saved. legal or economic unity (e.g. the judici-
For a decentralised solution, howev- ary and the welfare service) are con-
er, the tasks tend to be assigned to the cerned. Third, the Bund can participate
subordinate level. The advantage of in joint tasks if relevant measures by
such a regulation lies specifically in a individual states are of national rele-
greater efficiency of supply, since the vance and represent an improvement of
national task fulfilment can take place living conditions (e.g. agricultural
closer to the citizen. In each case, there- structure and coastal protection). Lastly,
fore, the advantage of the one equals the the municipalities are left with volun-
disadvantage of the other solution: tary tasks (e.g. theatres), legally assigned
however, the argument against consis- mandatory tasks (e.g. water supply) as
tent centralisation is that certain public well as with matters they carry out as
services are meaningful only if they can agents of the Bund and the Länder (e.g.
be offered locally (e.g. service provi- registry offices).
sion). Geographically, besides the distribu-
Consistent decentralisation, mean- tion of functions among the domestic
while, is limited by the desire to ensure regional government authorities, the
equal access for all to other public serv- European Union should count as the
ices (e.g. avoidance of a downward fourth level. When the principle of sub-
West–East or urban–rural gradient). For sidiarity is applied (e.g. Article 5 of the
the three-tiered regional government EEC treaty) it, too, has been assigned its
authorities in Germany – the Federal own competencies (e.g. the monetary
Republic (Bund), the 16 federal states system). At a national level, on the other
(Länder) and the more than 16,000 hand, this also applies to the so-called
municipalities – the principle of sub- →parastatals, which are tasked with
sidiarity applies: national services which social safety (e.g. unemployment or
are limited in their effects to an area or pension insurance). The distribution of
a region are to be regulated locally responsibilities and functions goes
and/or regionally. Only if the effects go together with expenditure distribution,
which has to be ensured by an appropri- ferent levels, which means that each
ate distribution of funds. case should be allocated to either local,
regional or central powers, based on its
REFERENCES: own merits.
DICKERTMANN, GELBHAAR, S. It also has to be taken into account
(2000), Finanzwissenschaft. Eine Einführung in that issues which are dealt with by the
die Institutionen, Instrumente und ökonomischen
public sector and the relevant expendi-
Ziele der öffentlichen Finanzwirtschaft, Herne/
ture (→public expenditure) have to be
Berlin, pp. 37ff.
reconciled with an appropriate budget,
Klaus Dieter Diller which is administered by a regional
government authority. This means that,
besides the federal division of labour,
the functioning of the public sector also
Financial constitution requires proper regulation of finances
(→public revenue).
The financial constitution is a set of The powers for the public sector
guidelines for the coordination of pub- responsibility are:
lic activities. In Germany, this sector is
subject to Article 20 of the Basic Law, • Decision-making competence I: Which
which deals with the federal system. regional government authority is
This system is based on ‘regional gov- competent to make decisions regard-
ernment authorities’ – the federal gov- ing how the implementation of these
ernment (Bund), the states (Länder) and responsibilities is to be organised?
the municipalities. Beyond these stands
the relationship with the →European • Executive competence: Which regional
Union (Article 23 of the Basic Law). government authority will be tasked
The core of the financial constitution with the execution of these responsi-
can be found in Chapter X of the Basic bilities?
Law entitled ‘Finance’.
Whether or not a particular issue • Financial competence: Which regional
ought to be the government’s responsi- government authority is responsible
bility depends – from the point of view for the arising expenditure in the
of the market economy – on whether context of the performance of these
public sector involvement would responsibilities?
achieve more substantial welfare gains
in that case than the otherwise Regarding the expenditure, which is
autonomous private sector. If public for the most part covered by taxes and
sector involvement is considered desir- borrowings, there are the following
able, the question is whether the issue powers:
should be dealt with by the federal gov-
ernment, the states or the municipali- • Decision-making competence II: Which
ties. regional government authority takes
Public sector involvement is charac- decisions on the structuring of these
terised by specific competencies at dif- revenues?
234 Financial constitution
• Administrative competence: Which re- ket’ and ‘state’, and also for the relation-
gional government authority is ship between the different regional gov-
responsible for revenue collection? ernment authorities, recourse is made to
‘the principle of subsidiarity’. This
• Competence of disposal: Which regional allows for responsibilities to be allocated
government authority is the final to a higher level (e.g. the federal govern-
recipient of these revenues? ment) only when the lower levels (the
states and municipalities) have been
These six areas of competency take shown to be incapable of achieving a sat-
care of the regulation and structuring of isfactory result on their own.
the system. What is still missing is the Second, this goes together with the
naming of the specific objectives which emphasis on the independence of the
the organisation of responsibilities, the regional government authorities – ‘the
procurement of revenues as well as principle of autonomy’. If this is not
their disposal has in view. Basically, the guaranteed, the stability of federal
financial constitution is supposed to structures as well as the transparency of
ensure that public sector responsibili- government activities are endangered.
ties and competences benefit the public, This is why the organisation of public
while at the same time ensuring the finance provides for separate budgets
cost-effectiveness of government for the regional government authorities
actions. In addition, national unity (Article 109, Basic Law).
must be safeguarded. Third, it is intended that each level
One initially more specific objective with specific tasks shall have the
emerging from these basic premises lies responsibilities allocated to it, together
in the aspiration to a balanced economy with the autonomous right to dispose
on the whole, as well as compensation of the required funds. This means that
for the uneven economic power of the each particular decision-making area is
different regional government authori- also assumed to be the most competent
ties (Article 104a, Basic Law) and also in in both the financial and the organisa-
the approximation to more equalised tional aspects of their areas of responsi-
living conditions (Articles 72, 106, bility. It also ensures that unilateral
Basic Law) throughout the entire coun- dependencies between the regional
try. government authorities are avoided.
Against this background, and in The causal relationship between deci-
conjunction with the regulations and sion-making competence I and the
structures discussed above, a number of competence of disposal is based on ‘the
central guidelines for the ‘organisation principle of connectivity’.
of public finance’ can be deduced. Fourth, it is intended above all to
In the first place, regarding the allo- achieve an advantageous division of
cation of ‘decision-making competence labour between the regional government
I’, a high degree of autonomy and self authorities. Both the executive power
responsibility is desirable. In order to and the fiscal power should be allocated
secure the implementation of this crite- to the level that is able to deal with them
rion for the relationship between ‘mar- in the most cost-effective manner.
Fifth, where the financing of public Fiscal federalism

interventions is concerned, and since
especially the private sector has been Fiscal federalism entails the provision
encumbered with contributions of a and the application of an economic
compulsory nature, the needs of each of concept in order to analyse and con-
these ‘groups of victims’ should be struct a →financial constitution. The goal,
taken into account to the greatest possi- aided by the relevant competences,
ble extent. Therefore, according to the objectives and structural principles, is
principle of fiscal equality, ‘decision- the theoretical design of an ‘optimal’
making competence II’ (regarding a system of government. A model of this
particular revenue) must be granted to sort can then be used in the assessment
that regional government authority of real governmental structures.
which represents the agents who are Fiscal federalism can be divided into
affected by the public interventions in two interrelated sections:
question.
Sixth, the financial constitution has • The distribution of public responsi-
to ensure that regional government bilities and public expenditure
authorities which find themselves in an between the regional government
unfavourable financial situation are still authorities (passive financial equalisa-
able to carry out their responsibilities. tion [or compensation]).
This rule is derived from the princi-
ple of solidarity (community solidarity), • A detailed investigation of the associ-
and requires above all rules with regard ated financial aspect from the per-
to the disposal of revenue. In reality, spective of funding – especially
and in particular regarding this last regarding tax (active financial equali-
point, this could potentially lead to con- sation).
flict with the other constituents of the
financial constitution. The degree to In a further structural progression,
which this applies to the German finan- it is possible to make the distinction
cial constitution is discussed under the between vertical financial equalisation
theme →fiscal federalism. (regulations between the different lev-
els of the regional government authori-
REFERENCES: ties, e.g. →Federal Republic, federal states,
APOLTE, T. (1999), Die ökonomische municipalities) and horizontal financial
Konstitution des föderalen Systems, Tübingen; equalisation (regulations between
BUNDESMINISTERIUM DER
regional government authorities at the
FINANZEN (ed) (2000), Bund–Länder
same level, e.g. between the states).
Finanzbeziehungen auf der Grundlage der gel-
tenden Finanzverfassungsordnung, Bonn;
The ‘allocation of public responsi-
LAUFER, H./ MÜNCH, O. (1997), Das bilities’ is exposed to the tug-of-war
föderative System der Bundesrepublik Deutsch- between forces favouring a centralised
land, 7th edition, Bonn. solution (through the federal govern-
ment or the →European Union), and
Dietrich Dickertmann those factors of influence which advo-
Peter T. Baltes cate a decentralised approach (through
236 Fiscal federalism
states and local authorities): when this fit the public services to the require-
happens, a central intervention by the ments of the people, while at the same
federal government is required only time monitoring the costs and effec-
when public goods (e.g. defence) are at tiveness of specific services. If this were
stake and when the country as a whole not done, private economic agents
is affected. Furthermore, centralised could make use of their assumed
areas of responsibility allow for the mobility and relocate to other regional
avoidance of expensive dual administra- government authorities (‘voting with
tive governmental structures, which their feet’).
also helps to ensure the impartiality and The fact that the above discussion of
transparency of the public sector. In structures and institutions may help to
addition, a decentralised organisation find where in the regional government
makes a general overview difficult; this authority specific public responsibilities
is particularly true in those cases where should be placed, may serve as a transi-
the decentralised levels do not possess tion from theoretical discussion to
the necessary powers of intervention or practical implementation. In reality,
the necessary funds (e.g. in the areas of however, such recommendations are
stabilisation or distribution). frequently not adhered to – for exam-
By contrast, decentralised areas of ple, in the case of historical develop-
responsibility subject to regional gov- ments at the respective governmental
ernment authorities are preferable level and also due to the need to restrict
when there are regional differences the number of federal units in order to
regarding needs and objectives: services maintain manageability.
offered at local level can respond to According to Article 30 of the Basic
such differences with flexibility and Law, the main focus for the allocation of
accuracy (avoidance of heteronomy). decision-making powers seems to lie
This also means that political decisions with the states. The federal government
are more accessible for the common has been assigned a number of areas of
person whose information is predomi- exclusive legislative powers which
nantly derived from local sources (a include, in particular, external affairs,
detailed view). Decentralised adminis- defence and monetary affairs (Articles
trative structures lower the costs (espe- 71 and 73, Basic Law). In practice, how-
cially communication costs) for the ever, the federal government has gained
individual citizen in his/her dealings a dominant position by attracting,
with government institutions. Finally, through concurrent legislation, a com-
this concept makes it possible to define prehensive list of areas of responsibility
and understand the relationship of the – for example, in the fields of jurisdic-
regional government authorities to one tion or welfare (Articles 72 and 74, Basic
another in terms of the idea of compe- Law). It follows that the states retain as
tition (competitive federalism). principal areas of involvement, mainly
It can be assumed that – comparable internal security and cultural affairs.
to the efficiency effect on the open As a means of redressing this imbal-
market – competitive pressure forces ance, the states have been granted the
the respective public service provider to opportunity to participate in a multi-
tude of federal laws via the Upper certain district will make use of the sub-
House of the German Parliament. The sidised cultural facilities of a town as
competence of implementation belongs their main centre because, for financial
largely to the states (Article 83, Basic reasons, such facilities are lacking in
Law) and includes a large number of their own area. The main centre is then
federal government duties, which in entitled to financial compensation for
many instances are executed by the this additional strain on its resources.
states in their capacity as agents of the Otherwise, planning of the nature and
federal government. extent of its involvement would not
The federal government is restricted make allowance for this additional
to its own administrative establish- regional service delivery, which means
ments, for example, for the manage- the neighbours’ needs would not be
ment of the federal finances (Article 86, catered to.
Basic Law). There are other areas of All in all, such guidelines require a
responsibility where regional and balancing act between the empower-
national interests are mixed, which sug- ment of the different regional govern-
gests that regional government authori- ment authorities and the concomitant
ties take on the responsibilities in the promotion of autonomous planning,
areas of overlap: this is how the federal and a due recognition of the contribu-
government and the states cooperate in tion and integrating effect of federal
the context of shared responsibilities institutions. The goal of preserving the
(mixed financing), dealing with the relationship between citizen/taxpayer
construction of tertiary educational and the regional government authority
institutions, improving regional eco- (principle of connectivity) while at the
nomic structures, agriculture and same time stimulating →competition
coastal protection (Article 91, Basic between regional government authori-
Law), as well as the joint involvement ties, is best served by investing the dif-
in educational planning and research ferent regional government authorities
(Article 91b, Basic Law). with the power of disposal of independ-
Successful management of the ent revenues on the basis of the system
financial side aims at boosting the capa- of separation.
bilities and the vitality of the federal This last point, however, brings a
organisation concerned. Added to this, number of significant disadvantages in
political objectives enshrined in the its wake: while citizens are in danger of
constitution, like the striving for equal incurring multiple charges, greater
or uniform living conditions (Article administrative expenditure is also to be
72(106)(3), Basic Law), must not be taken into account. There is also the
forgotten. question of whether this system can
Regarding the structure of the provide the regional government
financial system, it must be taken into authorities with adequate financial
account that the provision of public resources: due to socio-economic dif-
services is frequently coupled with a ferences between the regions, the rev-
national ripple-effect: it is to be expect- enue potential of regional bodies is
ed, for instance, that the citizens of a uneven. Public services, however,
238 Foreign trade
depend on regularity of revenue as well The regulations governing state

as on a degree of flexibility as far as financial equalisation used to be strong-
expenditure is concerned. If this is not ly criticised for their equalising effect
the case, severe financial risks could on the financial capacities of the differ-
result – for example, due to the suscep- ent states and for their disregard of the
tibility of many taxes to economic idea of competition. In a judgment of
change. This makes tax distribution by 11 November 1999, the Federal
allocation preferable to the system of Constitutional Court found that the
separation. While this system of alloca- procedures used for financial capacity
tion causes the competence of disposal assessments, as well as for the comple-
to be placed with one of the regional mentary federal allocation system, in
government authorities, fiscal revenue their current form were unconstitu-
is, however, distributed among the tional. The legislature was given until
regional government authorities. 31 December 2002 to deal with the
Financial redistribution in Germany resulting need for reform, which is to
represents (Article 104 a ff., Basic Law) be approached through the Financial
a mixed system, containing elements of Specification Act. It remains to be seen,
both the systems of separation and of however, whether the agreements made
allocation. In this way, taxes on petrole- at the end of June 2001 by the federal
um products are allocated to the federal government and the federal state heads
government, death duties are handled of government regarding future finan-
by the states and the trade tax is a pri- cial equalisation can be reconciled with
mary source of revenue for the munic- the principles of the judgment.
ipalities. The comparatively much
higher income and sales tax revenues, REFERENCES:
by contrast, are common; they are DICKERTMANN, D./GELBHAAR, S.

divided among the regional public lev- (1996), Finanzverfassung und Finanz-
ausgleich I/II, in: Das Wirtschaftsstudium, 4,
els according to certain percentages.
pp. 385ff., 5, pp. 486ff.,; PITLIK, H. (1997),
In order to balance the inequality of
Politische Ökonomie des Föderalismus,
revenue between the states, and in Frankfurt/M.; SCHMIDT, T. (2001),
order to accommodate their respective Finanzreformen in der Bundesrepublik
financial needs, their own revenues are Deutschland – Analyse der Veränderungen der
divided up according to a specific for- Finanzverfassunf von 1949 bis 1989, Berlin.
mula, and used for horizontal redistrib-
ution (state finance redistribution). The Dietrich Dickertmann
accompanying measures ensure that the Peter T. Baltes
financial capacity of the poorer states is
raised to a level of at least 95% of the
national average. In addition, the feder- Foreign trade
al government makes provision for
complementary federal allocations All cross-border economic transactions
which are granted to the disadvantaged of a country are part of its external
states for their ‘general financial needs’ trade. These include exports and
(Article 107(2), Basic Law). imports of goods and services, interna-
Foreign trade 239
tional movements of finance and capital In the statistical surveys on foreign

equipment and payments to suprana- trade, these interdependencies are regu-
tional institutions. larly reflected in high import and/or
As an economy, Germany is defined export quotas (proportion of imports
by its dependence on foreign countries and exports of the gross domestic prod-
and its openness towards global trade. uct) and reciprocal trade relationships
At first sight this does not seem obvi- with other EU states. Foreign trade
ous, but it becomes clear by looking at transactions show up in the national
the numerous products in Germany →balance of payments.
carrying the label ‘Made in China’ or The three major components of the
‘Manufactured in the European balance sheet illustrate the value of:
Union’. The dependence of jobs at
Volkswagen or BMW on changes in • all exported and imported goods and
demand in the United States explains services throughout the year, current
this situation further. cross-border transfers as well as net
German balance of payments, 2006
in s million
Credits Debits Balance
Current account
1. Foreign trade (exports / imports) 893,635 731,479 162,156
2. Complement of foreign trade 6,670 25,395 –18,725
3. Services 141,934 164,365 –22,431
of which: foreign travel 26,091 58,895 –32,804
4. Income from employment and investment 187,818 164,845 22,973
5. Current transfers 19,876 46,671 –26,795
of which: EU net payments –12,777
6. Balance of current account (1+2+3+4+5) 117,178
Financial account
7. Direct investment 34,168 63,311 –29,143
8. Commercial papers / securities 160,626 165,684 –5,058
9. Other capital transaction 94,337 209,687 –115,350
10. Reserve assets 2,934
11. Balance of financial account (7+8+9+10) –146,617
Remains and deferred items

12. Not itemisable transactions 29,630
Foreign exchange account (6+11+12) 191
Source: Deutsche Bundesbank

240 Foreign trade
factor incomes in relation to other capital costs, and thus to differences in

countries (balance of current the unit cost prices (→business account-
accounts); ancy).
A country will tend to concentrate
• capital exports and imports resulting on the production of goods which it can
in changes to the demands from and manufacture at a competitive price.
commitments towards other coun- Some of these goods are sold abroad in
tries (balance of capital transactions); exchange for products which in the
and importing countries would be relatively
expensive to make. In this way, produc-
• changes to the demands by the cen- tivity and the range of consumer goods
tral bank towards other countries, the on offer increase everywhere.
latter consisting predominantly of The monetary theory of foreign
foreign currency reserves (foreign trade tries to explain which factors
exchange balance). influence a national balance of pay-
ments, which mechanisms contribute
Foreign trade and its theory tend to to its equalisation, what causes
be divided into real and monetary for- exchange rate fluctuations on the for-
eign trade theory. The real foreign trade eign exchange markets, and how this
theory explains the structure of the affects the →business cycle, →employment
international division of labour and the and price levels. This dependence of
advantages of a global free trade organi- the internal stability of a national econ-
sation. omy on the degree of its international
Countries eventually specialise in integration raises the question of how
the production of certain goods due to much influence foreign trade policy can
the local unavailability of factors of pro- exert.
duction, or because of technical or eco- The extent to which a national
nomic obstacles to a production economy gets involved in the world
process, or due to differences in quality. markets depends, on the one hand, on
This means that of two countries using its import requirements – for example,
similar methods to manufacture the of raw materials which may not be
same product, one is likely to be able to available locally – and, on the other
manufacture or sell it for less. hand, on the specific orientation of the
The main justification for foreign foreign trade policy, which may be
trade, however, lies in comparative cost committed to free trade or to a protec-
advantages between different countries. tionist line of import displacement.
While two countries may be manufac- Thus, many countries are of the view
turing an identical product, their costs that the free exchange of goods and
may differ because one country has a services across national borders is
lead on productivity, or due to an harmful to the domestic economy since
unequal supply of the factors of pro- it displaces locally manufactured prod-
duction labour (quantitatively, qualita- ucts. Imported goods are then charged
tively, human capital) and capital; this with tariffs (import duties) and quanti-
leads to differences in the wage and ty restrictions (quotas) are imposed.
Globalisation 241
Exports, however, are generally At the international level, therefore,

regarded as beneficial for the domestic the concepts of free trade, free capital
economy and the labour market, so that and foreign exchange markets represent
export-oriented industries frequently the organisational equivalent of a free
get preferential treatment. This finds market system at national level (→world
expression in generous government trade order).
→subsidies, among other things, for the
promotion of international competi- REFERENCES:
tiveness. The situation is similar in the ROSE, K./SAUERNHEIMER, K. (1999),

area of international circulation of capi- Theorie der Außenwirtschaft 13th edition.
Munich 1999; SIEBERT, H. (1994),
tal which can be restricted through gov-
Außenwirtschaft, 6th edition, Stuttgart;
ernment measures (capital circulation
MAENNIG, W./WILFLING, B. (1998),
controls, exchange controls). Außenwirtschaft – Theorie und Politik, Munich.
Foreign trade relations are thus char-
acterised by numerous politically moti- Markus Neimke
vated distortions, giving rise to disputes
on foreign trade order theory.
Certainly since Adam Smith
(1723–1790), David Ricardo (1772– Globalisation
1823) and John Stuart Mill (1806–
1873), foreign trade theory has repre- The term globalisation has become a
sented one of the cornerstones of eco- buzzword with a variety of interpreta-
nomic theory. In these extensive early tions. In its prevailing definition, glob-
analyses, the protectionist opinions of alisation describes the phenomenon of
the mercantilists – who advocated the the modern international division of
limitation of commerce between the labour, which began during the 1970s.
nations and thus a restriction of domes- It is characterised by four different yet
tic consumption to locally produced interconnected aspects, namely:
goods – were proved wrong, and exten-
sive proof for the superiority of free • a high degree of openness of the
trade was supplied, particularly for the goods and services markets;
consumer (more goods, a large variety
of goods, lower prices due to more • internationalisation of production
competition). (multinational corporations);
Since then, the scientific discussion
has been focused on finding an answer • the worldwide integration of financial
to the question: How do foreign trade markets; and
relations come about and what are their
effects? Usually, the consensus is that • increasing international migration.
the free exchange of goods, capital and
currency has many benefits for all For the past three decades, the
countries involved, which seems to be growth rates of international current
particularly relevant in the age of and capital account transactions have
→globalisation. been consistently higher than the
242 Globalisation
growth rates of the national products. information and transport costs have
For this reason, international as come down to a fraction of their ini-
opposed to national economic activities tial levels. At the same time, more
have assumed growing importance. precise production and organisational
Added to which, especially in recent methods have made it possible to split
years, ever-greater numbers of people up complex production processes and
have been migrating to other countries services more and more (fragmenta-
for both economic and political reasons. tion of the production processes) and
The combination of these develop- to diversify internationally.
ments forms the core phenomenon of
globalisation. The consequences of globalisation
The following factors can be cited as are considerable and extend far beyond
the main reasons for this development: the economy. For the consumer, the
effects consist above all in an increas-
• Liberalisation of trade and capital ingly broad availability of international-
movements since the end of the ly produced goods and services at rela-
Second World War (through the tively affordable prices. For the produc-
General Agreement on Tariffs and er, on the one hand, the global market
Trade via the World Trade Organiza- offers new sales prospects, while on the
tion – GATT-WTO). other hand he/she is exposed to fierce
international competition. The com-
• Technological development. This bined effects of new opportunities in
means that over the past decades, the global marketplace and the chal-
The expansion of world trade, 1980–2006

Globalisation 243
lenges of international →competition are exchange of goods and services across

regarded as an important source of borders, as well as performance optimi-
international economic growth. sation (international allocation of
The technical development of com- resources) in such a way that all those
munication technologies and data pro- involved can benefit. The majority of
cessing has been especially responsible experts regard these advantages as so
for the globalisation of the financial significant that they are rated as a cru-
markets. It is estimated that the volume cial contribution to the unique eco-
of the current global foreign exchange nomic development that has taken
turnover amounts to 50 times that of place since the Second World War
the trade with goods and services. (growth effect of the external econo-
In both the material and the mone- my).
tary sectors of the economy, globalisa- From a political perspective, the
tion is accompanied by a greater degree positive contribution of open economic
of international interdependence, which systems to the development and stabili-
is also politically relevant. This means sation of open (democratically legit-
that a national economic policy’s scope imised) social systems has to be
for action becomes more limited to the stressed. Popular claims wanting to
extent to which decisions that have an make globalisation responsible for the
impact on conditions of location and/or gap which is widening between poor
macroeconomic data, have rapid and countries and those that are rich cannot
perceptible economic repercussions – stand up to an in-depth examination. It
such as changes to the flow of capital is true, however, that countries which
and goods and/or to the location deci- refuse to participate in globalisation
sions of corporations with an interna- cannot share in its successes, and are
tional presence (→systems competition). therefore falling behind on the world-
Depending on one’s point of view, wide income scale. For these states,
the shrinking scope of action of the however, globalisation is not the prob-
national economic policy is either inter- lem but the solution.
preted as threatening the welfare state If globalisation nevertheless creates
(‘race to the bottom’) or as a welcome anxiety and fear, this is partly due to the
remedy against unsound economic high degree of volatility in the interna-
policies (‘restraint of an over-inflated tional financial markets, which react to
→welfare state’) (→public debt). The shifts in economic and political data and
unpredictability of the international, their estimated consequences (expecta-
largely unregulated, financial markets tion formation) with rapid and often
(→speculation) and the growing compet- unexpectedly violent changes to capital
itive pressure from abroad (cheap wage flows (overshooting).
countries) are also seen as dangers to Reforms of the financial markets
the nation state. (and of the International Monetary
In assessing this state of affairs, it Fund) are aimed at improving both the
must firstly be noted that globalisation transparency of the system and the reli-
is the result of an increasingly open ability of the data and the participants
world economy. This allows the without sacrificing the benefits of free
244 Globalisation
Transnationality Index* of host economies,** 2002
Developed TNI Developing TNI Central and Eastern TNI

economies (%) economies (%) Europe (%)
Weighted average of group 11.2 13.3

Weighted average of group 19.2
Weighted average of group
Simple average of group 22.8 Simple average of group19.0 20.4
Simple average of group
Japan 1.0 Indonesia -0.1 Belarus 5.2
Italy 6.1 Saudi Arabia 2.2 Serbia and Montenegro 5.9
Greece 7.4 India 3.1 Bosnia and Herzegovina 8.7
United States 7.7 UAE 4.1 Ukraine 10.3
Norway 12.5 Republic of Korea 4.8 Albania 10.3
France 13.5 Turkey 7.4 Romania 12.1
Germany 14.3 Barbados 8.2 Poland 15.6
Austria 14.8 Philippines 8.9 Croatia 17.4
Portugal 14.8 Taiwan (prov of China) 9.1 Latvia 18.8
Israel 16.1 Egypt 9.7 Russian Federation 19.3
United Kingdom 16.8 China 10.6 Bulgaria 19.9
Switzerland 19.3 Costa Rica 12.6 Slovenia 22.3
Australia 19.4 Peru 13.2 Lithuania 23.3
Finland 20.4 Brazil 14.5 Slovakia 27.5
Spain 20.5 Thailand 15.2 Moldova, Republic of 28.9
Canada 20.7 Mexico 15.3 Hungary 30.1
New Zealand 27.4 Colombia 17.4 Czech Republic 30.9
Sweden 28.5 Bahamas 18.1 Estonia 39.0
Denmark 35.3 Guatemala 19.3 Macedonia, TFYR 41.4
Netherlands 38.4 Dominican Republic 19.4
Ireland 69.3 Venezuela 19.4
Belgium and 77.1 South Africa 19.6
Luxembourg Argentina 19.9
Malaysia 20.9
Ecuador 21.4
Jamaica 23.0
Panama 23.7
Honduras 26.8
Chile 27.0
Trinidad and Tobago 51.2
Singapore 60.3
Hong Kong, China 81.6
* Average of the four shares : FDI (foreign direct investments) inflows as a percentage of gross fixed capital formation for the past
three years 2000-2002; FDI inward stocks as a percentage of GDP in 2002; value added of foreign affiliates as a percentage of GDP in
2002; and employment of foreign affiliates as a percentage of total employment in 2002.
** Only the economies for which data for all of these four shares are available were selected. Data on value added are available only
for Belarus, Czech Republic, Finland (2001), France (2001), Hungary (2000), Ireland (2000), Italy (1997), Japan (1999), Netherlands
(1996), Norway (1998), Poland, Portugal, Sweden (2000), United Kingdom (1997), United States, China, India (1995), Malaysia (1995),
Singapore (2000), Taiwan Province of China (1994) and the Republic of Moldova . For Albania, the value added of foreign owned firms
was estimated on the basis of the per capita inward FDI stocks and the corresponding ratio refers to 1999. For the other economies,
data were estimated by applying the ratio of value added of United States affiliates to United States outward FDI stock to total inward
FDI stock of the country. Data on employment are available only for Austria (2001), Czech Republic, Denmark (1996), Finland (2001),
France (2001), Germany, Hungary (2000), Ireland, Italy (1999), Japan (2001), Netherlands (1996), Norway (1996), Poland (2000),
Portugal, Slovenia (2000), Sweden (2001), Switzerland, United Kingdom (1997), United States, Hong Kong (China) (1997), Indonesia
(1996) and Singapore (2001). For Albania, the employment impact of foreign owned affiliates was estimated on the basis of their per
capita inward FDI stocks and the corresponding ratio refers to 1999. For the remaining countries, data were estimated by applying the
ratio of employment of Finnish, German, Japanese, Swedish, Swiss and United States affiliates to Finnish, German, Japanese,
Swedish, Swiss and United States outward FDI stock to total inward FDI stock of the economy. Data for France, Netherlands, Norway,
Sweden and United Kingdom refer to majority-owned foreign affiliates only.
Note: The simple average refers to the simple mean of the indices of the individual countries within each group, while the weighted
average takes into account the weight of that each country has in each the four shares.
Source: UNCTAD estimates
Growth 245
capital flows. But frustrations are also REFERENCES:
caused by the rapid and sometimes BERG, H. (ed) (1999), Globalisierung der
drastic structural changes to which Wirtschaft: Ursachen – Formen – Konsequenzen,
Schriften des Vereins für Sozialpolitik, 263,
modern national economies are gener-
Berlin; SIEBERT, H. (ed) (2003), Global
ally subjected, which are exacerbated by
Governance: An Architecture for the World
the forced international division of Economy, Berlin; WORLD BANK (2002),
labour. In this regard, the consequences Globalisation, Growth and Poverty: Building at
of international migration are also of Inclusive World Economy, Washington, D C.
importance (→international migrations).
From an economic perspective, the Heinz Gert Preuße
migration of workers leads to a tangen-
tial adjustment of international wage
relations, and suggests therefore a desir-
able effect in global terms. At the same Growth
time, however, within the national
economies it throws up potentially Economic growth refers to an increase
explosive social and political questions of the real income per head of the pop-
(→integration, brain-drain) and can lead ulation; in this case, the real income is
to more pressure on lower-wage cate- most appropriately measured by the
gories in high-wage countries. real gross domestic product. Due to this
The free market answer to these growth, people can enjoy a better sup-
challenges of globalisation lies both in ply of goods and services. It is impor-
greater individual readiness to adjust, tant to state that this growth does not
and in the creation of basic political necessarily mean more goods and serv-
conditions which favour mobility ices (quantitative growth), but may
(→international organisations). mean that the real value of the goods
Beyond that, the establishment of and services increases (qualitative
quality →vocational training and further growth).
education systems as well as the creation Production in a national economy
of excellent opportunities for research occurs by means of the factors of pro-
and development are the major chal- duction – labour, capital and technical
lenges facing the highly developed knowledge. If the per capita capital
national economies in the global con- investment goes up and if the technical
text of innovation and competition. knowledge grows, then the economy
Since the beginning of the 1990s a will also grow in the sense of the above
possible but controversial alternative definition. A rising capital input means
answer to the global challenges is seen that net investments are made. This
in the creation of regional integration makes investment a driving force of
agreements. This would mean the glob- economic growth.
al world economy being superseded by It used to be the accepted opinion
a close network of regional economic that investment was the dominant
zones whose relationship with multilat- growth factor. On the basis of this opin-
eralism is under a certain amount of ion, especially during the 1950s and
strain. 1960s, many countries adopted growth
246 Growth
policies focused on the preferential should receive the best possible educa-
development of the heavy industries tion and that those who are already
(e.g. steel plants) and mechanical engi- working should continually be given
neering (→industrial policy). However, further training and further qualifica-
subsequent investigations showed that tions (→vocational training and further
increased technical knowledge, thus education).
technical progress, is far more impor- R&D takes place in research institu-
tant for growth than investment. tions of the business sector, universities
This is why more attention is paid and academies. As a rule of thumb, it is
today to the promotion of technical assumed that higher expenditure on
progress than to the promotion of R&D leads to greater technical
investment. But an economic policy progress, but it is (still) not possible to
that serves its purpose has to be based quantify this relationship precisely.
on an understanding of technical It follows that a growth policy
progress. Very recently, two potential which is focused on the future also
explanations for this have started to wants to promote the accumulation of
emerge: the accumulation of human human capital and the development of
capital; and the promotion and execu- R&D activities without forgetting
tion of research and development investment, i.e. the formation of mate-
(R&D). rial capital.
Human capital refers to expenditure Finally, one has to consider the lim-
on knowledge acquisition, i.e. especial- itations of growth. The metaphor of the
ly for schools, universities and ‘spaceship earth’ is popular. It says that
advanced training courses. The accu- on earth, as in a spaceship, all natural
mulation of human capital therefore resources are limited. This statement is
simply means that the next generation followed by the conclusion that eco-
Purchasing power of one wage minute in Germany, 1960–2005
1960 1991 2000 2005
Item unit h min h min h min h min
Bread 1 kg 0 20 0 11 0 11 0 10
Butter 250 g 0 39 0 6 0 5 0 4
Pork chop 1 kg 2 37 0 38 0 31 0 30
Filter coffee 250 g 1 46 0 12 0 11 0 9
Dress 1 item 26 28 9 33 8 34 7 0
Electricity 200 kWh 10 7 3 15 2 42 2 56
Petrol 1l 0 14 0 4 0 5 0 5
Refrigerator 1 item 156 30 31 3 29 22 23 53
TV set 1 item 351 38 80 38 51 30 34 30
Daily newspaper 1 month 1 41 1 13 1 25 1 32
Source: German Institute for Economics

nomic growth cannot go on indefinite- those undergoing practical vocational

ly since the resources that are necessary training.
for production will eventually run out. Anyone who is not a compulsory
This conclusion is nevertheless contro- candidate for membership of the statu-
versial. But it can also be stated that tory Health Insurance scheme may join
resources are saved, especially thanks to on a voluntary basis. About 90% of the
technical progress, so that their avail- population and their families, who are
ability becomes practically unlimited co-insured at no extra cost, belong to
(→resource protection). Yet this applies the statutory Health Insurance scheme.
only to natural resources, such as min- About 9% of the population are mem-
erals, metals etc., but not to energy. bers of a private health insurance
Owing to its physical characteristics, scheme.
energy cannot be saved unconditionally. The statutory Health Insurance
In the very long term, therefore, further scheme is divided into local health
economic growth will be possible only insurance schemes and company health
if mankind solves the energy problem. insurance schemes (for employees),
social miners’ and mine employees
REFERENCES: insurance, guild insurances, agricultur-
MEYER, E. C/MÜLLER SIEBERS, K.-W. / al health insurance schemes and substi-
STRÖBELE, W. (1998), Wachstumstheorie, tute sickness insurance societies. The
2nd edition, Munich, Vienna; GABISCH,
insured have the right to choose
G. (1999), Konjunktur und Wachstum, in:
between these different options.
Bender, D., et al (ed), Vahlens Kompendium
der Wirtschaftstheorie und Wirtschaftspolitik, 1,
Each one of these schemes is
7th edition, Munich; BARRO, R. J./SALA - financed through contributions calcu-
I -MARTIN (1998), Wirtschaftswachstum, lated in order for contribution revenues
Munich, Vienna. to cover current expenditure. The con-
tribution charged is a percentage of
Günter Gabisch earned income (or pension, unemploy-
ment pay, etc.) which does not go
beyond the level of the contribution
Health insurance assessment limit (2004: s3,487.50).
In 2003, the average contribution
As a protective measure against health rate was 14.4%, with the employee and
risks, a large proportion of the German employer each paying half this amount.
population belongs to the statutory In the case of pensioners belonging to
Health Insurance Scheme. Workers and the statutory Pension Insurance
employees have to be members, provid- Scheme, the scheme covers half of this
ed their monthly earnings do not contribution. Members of private pen-
exceed the liability-to-insure limit sion schemes, however, are charged the
(2004: s3,862.50). The liability-to- full contribution rate as well as in the
insure also applies to farmers and their case of company pension schemes.
family members who work on the farm, Recipients of unemployment benefits
artists and journalists, the unemployed, have their contributions covered by the
the disabled, pensioners, students and Unemployment Insurance Scheme.
248 Health insurance
While private health insurance pre- ed. From week seven of the employee
miums are calculated on the basis of the being sick, it is the duty of the statutory
insured individual’s disease risk Health Insurance Scheme to start pay-
(dependent on age, sex, previous illness- ing out sickness benefit. The sickness
es, etc.), the statutory Health Insurance benefit equals 70% of the regular wages
Scheme contributions are linked to up to the contribution assessment limit.
→income. However, the fact that all Private health insurance benefits are not
insured, including the non-contributory prescribed by the legislator, but rest on
family members, are entitled to the a contractual agreement between the
same quality of service means that the insurer and the insured.
statutory Health Insurance Scheme has Over the past several decades the
to spread out the financial burden introduction of new medical technolo-
among the insured by applying the soli- gy and equipment, new medicines and
darity principle. This makes it possible the growing number of senior citizens
to provide those sectors of society with have sharply increased the service costs
adequate risk protection for which pri- of the statutory Health Insurance
vate health insurance is unaffordable. Scheme, with the consequence that
Examples are small income earners, both the insured and the employers
large families and senior citizens. have had to bear the brunt of higher
The services offered by the statuto- contributions. In order to counteract
ry Health Insurance Scheme include this development, a number of reforms
measures for disease prevention and have been introduced into the health
treatment, and financial benefits to service. Among these are the exclusion
make up for lost earnings in the event of certain services from the service cat-
of chronic illness. Services include alogue (examples: over-the-counter
examinations for the early detection of medications, spectacle frames, death
diseases such as cancer, heart disease benefit), the introduction of supple-
and circulatory and kidney disorders, mentary payments by the insured (e.g.
health cures and the intensified preven- for medication, hospitalisation, health
tion of tooth decay, especially for chil- cures, transport costs and dentures) and
dren and adolescents. The cover the so-called budgeting, which entails
includes treatment by physicians and the introduction of upper limits for the
dentists in private practice, hospital financing of the services rendered or
treatment and the supply of medication, initiated by hospitals and physicians in
bandages, recovery assistance and other private practice.
remedial services. As a result of the law for the mod-
The employer is obliged to continue ernisation of the statutory Health In-
full salary payments before tax for a surance Scheme, which was adopted in
maximum period of six weeks in the 2003 and came into force on 1 January
event of inability to work due to an ill- 2004, further supplementary payments
ness for which the employee is not to were introduced and existing personal
blame, and also in the event of a health contributions were increased – by a con-
cure having been approved. The siderable margin in both cases. A new
employee’s income is therefore protect- consultation fee for visits to doctors and
Housing policy: New federal states (Länder) 249
dentists amounting to s10 per quarter political reasons, rents were kept low.
was introduced. The insured has to Rents for old buildings had been frozen
make a personal contribution of 10% of at 1936 price levels, while rents for new
the price of medication, bandages and buildings were in 1981 officially deter-
other remedial services, with the charge mined at an average of about s0.45/m²
being not less than s5 or more than of floor space. These rents neither
s10. Likewise, supplementary payments reflected the value of the accommoda-
for the provision of other remedial serv- tion concerned, nor were they cost-
ices (physiotherapy, massages, etc.) and covering. Rental income only covered
hospitalisation were increased. 10–15% of the expenditure, with the
More recently, dentures and the pay- consequence that houses fell into disre-
ment of sickness benefit were removed pair because no maintenance was
from the service catalogue of the statu- carried out, and inner cities were be-
tory Health Insurance Scheme. Patients coming depopulated. Decaying housing
will now need to be separately insured at stock was the price one had to pay for
an additional fee, with the employers no an average rent burden of 4%.
longer involved in the financing of these The unification treaty which result-
services. ed from the union of East and West
Germany on 3 October 1990 created the
REFERENCES: institutional, legal and economic frame-
LAMPERT, H./ALTHAMMER, J. (2004), work for a market economy, which was
Lehrbuch der Sozialpolitik, 7th edition, Berlin; to include the housing sector.
LAMPERT, H./BOSSERT, A. (2004), Die
Article 22(4) of the unification
Wirtschafts- und Sozialordnung der Bundes-
treaty made provision for the →privati-
republik Deutschland im Rahmen der EU, 15th
edition, Munich, Vienna.
sation of the formerly state-owned
housing stock. The municipalities, as
Albrecht Bossert the initial owners of the previously
nationalised housing stock, were given
the task of integrating this property into
the open market. This meant that the
Housing policy: housing stock had to be managed and
New federal states (Länder) administered by privately-run →enter-
prises, which had to find private tenants
Housing policy in the German or capital investors for it.
Democratic Republic (GDR) (East The Accumulated Debt Assistance
Germany) was characterised by state- Act made it easier for the housing com-
controlled housing construction and panies to service national loans which
rents. For political and economic rea- had been granted by the GDR for new
sons, the favoured construction of new dwellings. The Federal Republic of
buildings used prefabricated slabs, Germany was the new creditor and
while at the same time the maintenance partly waived the old loan repayments
and modernisation of existing housing on condition that the companies agreed
stock was neglected. Owner-occupied to privatise at least 15% of their housing
housing was very limited. For social and stock.
250 Housing policy: New federal states (Länder)
The focus on a social but also mar- Investment Subsidy Law. However, in
ket-related housing policy in the new some cases the considerable tax incen-
states had to make allowance for the tives offered by the Development Areas
high average age and the disrepair of Act led to new dwellings being built
existing dwellings. As a result, the more because of the tax relief than in
restoration of the housing stock was a response to market demand.
political priority. This also meant that An important component of the
step by step, rents had to be increased. housing policy in the new states was,
There was an urgent need to and is, the broad support for private
mobilise private capital for investment ownership of residential property,
in the construction of new dwellings in which was initially predominantly
order to improve the quality and quan- focused on newly built housing but
tity of the housing on offer. The goal of now increasingly includes the existing
the housing policy was the creation of a housing stock.
functioning housing market. To this In the new states, social welfare
end, the housing enterprises had to be housing construction was predominant-
aligned to the open market. But owner- ly used for the necessary investments
occupancy also had to be encouraged. into renovation and modernisation of
The First and Second Ordinance on the existing housing stock. This process
Basic Rent, the Housing and Rent Law was seen as an opportunity to avoid the
Conversion Act and the introduction of structural faults of traditional social wel-
a comparative rent system in 1998 fare housing, which were caused by the
created a social and market-related rent principle of renting at cost. It was large-
policy aimed at the transfer of state con- ly possible to prevent mistakes in occu-
trolled rents into the comparative rent pancy through the flexible arrangement
system of the open market. Thus the of financial assistance. From the start,
maximum rents were gradually the construction of subsidised social
increased with due consideration of welfare housing was of secondary
income trends and the individually tai- importance in the new states.
lored assistance of special housing ben- Since the end of the 1990s, the new
efits. Rent restrictions on new, altered construction of social welfare housing
and modernised buildings had already has only been used in certain cases of
been lifted in 1990. As a social safety net urban planning when urgently required.
and to soften the impact of the rent Since the comparative rent system was
increases, a Special Housing Benefit introduced in 1998, supply has increas-
Act was introduced. This law also made ingly exceeded the demand (tenant mar-
it possible to complete urgently needed ket). Many dwellings are unoccupied,
renovations of the housing stock in a particularly in the economically back-
socially acceptable manner. ward regions, where up to 30% of the
An initial step towards promoting housing stock is standing empty.
housing construction through tax bene- On the one hand, the reasons for
fits was the special regulations of the this have to do with the collapse of the
Development Areas Act, which were economic base in these areas. There has
replaced on 1 January 1999 by the been a population decrease due to job-
related migrations and a rapid decline of Housing policy:

the birth rate. On the other hand, many Old federal states (Länder)
private households have become
owner-occupiers and have moved out Cave, tent, house or skyscraper – shel-
of the cities into the surrounding counter is a basic human need just like food,
tryside. The declining population trend water and sleep. Nothing else can take
was accompanied by the intense mod- its place. The need for shelter is para-
ernisation and building activities of the mount in every household at all times.
1990s, with the consequence of a grow- Shelter is necessary for protection; it is
ing supply surplus. indispensable for the survival of the
Due to this development, from 1999 individual and for that of social groups
onwards there has been a reorientation (families).
of the housing policies of the →Federal It had already become obvious in
Republic, federal states and municipalities. the 19th century that the housing mar-
For a purposeful stabilisation and con- ket could not be left to its own devices.
tinued development of the housing Industrialisation and the associated
market, the deconstruction or demoli- migration from the rural areas meant
tion of dispensable housing is undertak- that the need for housing in the cities
en on the basis of local urban develop- rose steeply. Land speculation, rent
ment plans. This is how, in reaction to racketeering and homelessness were the
the changed demand, a future-oriented consequence. Government interven-
change of the cities is aimed at, and at tions became necessary in order to pre-
the same time a balanced housing mar- serve law and order and also for public
ket on a long-term basis is secured. health reasons. Outbreaks of epidemics
This enormous challenge for urban among the poorer classes of society
planning and for the housing industry constituted a marked impairment of
is supported with substantial subsidies their working capacity. During this
by the federal government and regional urbanisation process, minimum stan-
states programme ‘Urban Restruct- dards for housing construction were
uring in the New Federal States’. specified for the first time. This was
also the time when the first self-help
REFERENCES: groups (housing cooperatives) came to
BEHRENDT, J. (1992), Die Transformation life, and housing construction by the
einer zentralverwalteten Wirtschaftsordnung in eine employer was one of the outcomes.
Soziale Marktwirtschaft am Beispiel der
The universal housing shortage
Wohnungswirtschaft, Dissertation, Faculty of
after the First World War was the reason
Economics and Sociology, University of
Cologne; EXPERTENKOMMISSION
for increased government interventions
WOHNUNGSPOLITIK (1994), Wohnungs- in the housing market. Numerous laws
politik für die neuen Länder, Gutachten im Auftrag to combat the housing shortage were
der Bundesregierung, Bonn; LEONHARDT, passed. These interventions developed
K. (1996), Wohnungspolitik in der Sozialen into a system of ‘government-con-
Marktwirtschaft, Bern, Stuttgart, Vienna. trolled housing management’ (which
included tenant allocation and alloca-
Katrin Leonhardt tion control), which was practised until
252 Housing policy: Old federal states (Länder)
the beginning of the 1960s. After the The answer is: yes and no.
Second World War, nearly a quarter of Yes, because users and suppliers can
the housing stock of some 18 million exchange the commodity ‘shelter’ to
dwellings had been destroyed and more suit their own tastes, freely, and for
than 12 million refugees had to be money, and because market prices tend
accommodated. Providing the popula- to create a balance between the supply
tion with housing therefore became the of usable living space and the respective
government’s priority. demand. The special characteristics of
A Housing Ministry at federal level this commodity do not change this
was established. Further milestones (immobility, long life span, etc.). While
were the First (1950) and the Second they do cause problems in the housing
(1956) Law on Public Subsidies for the market, they cannot bring it to a halt.
Construction of Low-Rental Apart- And no, because certain households
ments, which gave legal status to the are only insufficiently supplied with
three components of state intervention housing by the market, or even not at
(government-funded social welfare all. The latter occurs whenever house-
housing, house building with tax relief holds with small →incomes have to
and with independent funding). To this spend a large proportion of their
day, the Second Law on Public incomes on minimal shelter (distribu-
Subsidies for the Construction of Low- tion problem) and/or if certain social
Rental Apartments forms the basis for groups are discriminated against
the social housing policy, but it also because of their specific characteristics
provided the background for the fami- (access problem). In a →social market
ly-orientated promotion of privately economy, the government has the task of
owned residential property. providing a minimum of living space in
The reduction of the housing short- the event of somebody not being able to
ages was accompanied by the →deregu- do so for themselves (subsidiarity prin-
lation of the housing industry and the ciple). Therefore, the housing policy
gradual opening up of the housing sec- has to address the distribution and
tor to the open market. At that point, access problems as a matter of priority.
the transition from the allocation sys- This means that the rent burden has to
tem that was appropriate after wartime be tolerable for households living on a
to a market-orientated housing policy small income, and households belong-
had been achieved. Subsequently, phasing to the so-called ‘problem groups’
es of strain and relaxation came and have to be given access to the housing
went. Today, in terms of numbers, the market.
housing market is balanced, with the Besides these outstanding supply
number of dwellings being roughly issues, the government as the imple-
equal to the number of households. menter of the housing policy also stipu-
This could lead to the conclusion lates basic conditions, which are sup-
that any form of government control posed to ensure efficient interactions
has become superfluous. But is the between →supply and demand in the
housing market a market like any housing market, e.g. the Law of
other? Can it be left to its own devices? Tenancy. Finally, the private housing
property policy is usually subsumed way out of this would be the purchase
under the housing policy, although its of allocation restrictions from the hous-
purpose is only marginally related to ing stock; the access problem would be
housing policy. Its main targets are solved. Housing subsidies which have
→family policy and capital formation become more important as instru-
policy, as well as retirement provision. ments, take care of the social security
According to Eekhoff, three sectors issue. But so far, not much use has been
of practical housing policy can be dif- made of the acquisition of allocation
ferentiated in Germany: rights.
The social guarantee of housing Securing advantageous offers and

The instruments which are used for the conditions for use
implementation of this social guarantee This includes the identification and
are housing benefits (distribution prob- development of building land, urban
lem), social welfare housing and, more renewal and urban development meas-
recently, the purchase of allocation ures, the Law of Tenancy as an instru-
restrictions for publicly assisted hous- ment for the coordination of the inter-
ing (both cases: access problem). Needy ests of tenant and landlord (closely
tenant and owner households receive linked to the protection against unfair
housing benefits, which are also dismissal), as well as the tax law.
referred to as subject promotion. This
enables them to rent or live in accom- Private residential property policy
modation that is suitable for their fami- The promotion of owner-occupied
ly situation at market prices. The accommodation is often strongly moti-
advantages of a housing subsidy are its vated by wealth creation criteria (home
flexibility, its social accuracy and fair- ownership grant), but in addition – in
ness, as well as its efficiency because the the context of social welfare housing
preferences of the consumer are taken programmes – it also serves specific
into account. housing policy objectives.
But housing subsidies do not solve The Act on the Reform of Housing
the access problem. This in turn is Construction Law which was passed on
achieved by social welfare house build- 1 January 2002, fundamentally reform-
ing, which is also referred to as object ed the housing law and initiated a new
promotion. This starts with the housing phase in the social welfare housing pol-
supply and with investors in housing icy in Germany. The core of the law is
programmes who receive →subsidies. In the new Housing Assistance Act, which
return, they have to grant restricted replaces the Second Law on Public
allocation and reduced rents. The big Subsidies for the Construction of Low-
problem here is that the social accuracy Rental Apartments. Four elements play
is significantly poorer than in the case a central role:
of housing subsidies, since a consider-
able number of government-assisted • Focused assistance on those who are
dwellings are misallocated, i.e., they are really needy (large families, low
not allocated to needy households. One income).
254 Income
• More consideration on the existing as risk premium for the →entrepreneur).

housing stock. The income distribution that results
from this remuneration of the different
• Promotion of the acquisition of used factors of production for their contri-
residential property. bution to the national income is the so-
called ‘functional income distribution’.
• Closer cooperation between housing Macroeconomically, the sum of
policies and town planning. these factor incomes corresponds with
the national income, and thereby with
REFERENCES: the total value of all goods and services
EEKHOFF, J. (2002), Wohnungspolitik, 2nd produced through the employment of
edition, Tübingen; EXPERTENKOM- the factors of production in a specific
MISSION WOHNUNGSPOLITIK
space of time (net national product to
(1994), Wohnungspolitik auf dem Prüfstand,
factor costs). The distribution of the
Gutachten im Auftrag der Bundesregierung, Bonn;
KÜHNE-BÜNING, L./HEUER, J. H. B.
income among the factors of produc-
(ed) (1994), Grundlagen der Wohnungs- und tion which arises from the economic
Immobilienwirtschaft, 3rd edition, Frankfurt/M. production process is also called ‘pri-
mary income distribution’.
Winfried Michels These factor incomes which are
earned exchanging goods and services
stand opposite transfer incomes.
Transfer incomes are paid out to eco-
Income nomic agents without (direct) returns
on the basis of legal claims (e.g. pen-
Income is the flow of goods (material sions, retirement funds, unemploy-
income) or amounts of money (finan- ment pay), voluntary allowances from
cial income) which a person, a house- the state (→subsidies) or other private
hold or an →enterprise receives within a economic agents.
certain space of time from various dif- After this rearrangement of parts of
ferent sources. the functional income through trans-
In the production process of an fers (and taxes), the primary income
economy, income is generated as pay- distribution becomes the secondary
ment for the employment of the factors income distribution. This rearrange-
of production (labour, land, capital, ment is justified by the fact that social
→production and supply). In return, the security is dependent on a ‘fair’ income
factors of production are remunerated distribution (→social justice).
with the factor incomes wages and Despite all the differences of opin-
salaries, rent and lease, interest and ion (which even in the →social market
→profit (wages and salaries as payment economy are still ongoing) on what can
for work performed; rent and lease as be considered as just (fairness of pay,
payment for the supply of land or the opportunity or need), agreement exists
temporary hiring of other capital equip- that excessive inequality in income dis-
ment; interest in return for the supply tribution must be avoided. For this rea-
of available capital, profit – or also loss – son, a progressively running income tax
Income 255
tariff which charges higher income that a household has both a wage
groups proportionally more, is consid- income as well as incomes from other
ered an equally integral component of factors of production (e.g. investment
the social market economy as support income and rental income). Thus the
for those who are not capable of earning personal income distribution is more
a functional income (sufficient). appropriate as a starting point for the
However, both measures can also lead investigation of the income distribution
to lower motivation to perform, or to and for the distribution policy in a
be ready to perform, as well as to national economy than the functional
increased evasion into the →shadow income distribution.
economy. As a standard for the distribution of
In order to examine questions of income in a national economy, the
income distribution among population Lorenz curve is used (named after the
groups or individual subjects of the American Max Lorenz, who introduced
economy, the topic of functional this form of representation in 1905). It
income distribution has to be changed shows which percentage of income-
to personal income distribution. This earners (abscissa) in each case receives
considers the sum total of incomes of a which portion of the national income
group of economic agents (e.g. the pri- (ordinate).
vate households or the self-employed) A national economy where all eco-
and takes into consideration the fact nomic agents receive the same income,
Composition of total national income (Germany) , 1996 and 2006

256 Income
Income equality: Gini Index of the last available year between 1985 and 2004
Country Gini Country Gini Country Gini

Index Index Index
Namibia 74.3 Nicaragua 43.1 Greece 34.3

Lesotho 63.2 Iran. Islamic Rep 43.0 Indonesia 34.3
Botswana 63.0 Uganda 43.0 Ireland 34.3
Sierra Leone 62.9 St. Lucia 42.6 Kazakhstan 33.9
Central African Rep 61.3 Kenya 42.5 Armenia 33.8
Swaziland 60.9 Singapore 42.5 Switzerland 33.7
Bolivia 60.1 Burundi 42.4 Yemen 33.4
Haiti 59.2 Zambia 42.1 Moldova. Rep 33.2
Colombia 58.6 Thailand 42.0 Sri Lanka 33.2
Brazil 58.0 Senegal 41.3 Belgium 33.0
Paraguay 57.8 Ghana 40.8 France 32.7
South Africa 57.8 Turkmenistan 40.8 Canada 32.6
Chile 57.1 United States 40.8 Tajikistan 32.6
Panama 56.4 Cambodia 40.4 India 32.5
Guatemala 55.1 Georgia 40.4 Bangladesh 31.8
Peru 54.6 Guinea 40.3 Korea. Rep 31.6
Honduras 53.8 Trinidad and Tobago 40.3 Romania 31.0
Argentina 52.8 Russian Federation 39.9 Netherlands 30.9
El Salvador 52.4 Tunisia 39.8 Luxembourg 30.8
Dominican Rep 51.7 Mozambique 39.6 Pakistan 30.6
Papua New Guinea 50.9 Burkina Faso 39.5 Kyrgyzstan 30.3
Mali 50.5 Morocco 39.5 Mongolia 30.3
Niger 50.5 Israel 39.2 Ethiopia 30.0
Malawi 50.3 Macedonia, FYR 39.0 Belarus 29.7
Gambia 50.2 Mauritania 39.0 Bulgaria 29.2
Zimbabwe 50.1 Jordan 38.8 Austria 29.1
Costa Rica 49.9 Portugal 38.5 Croatia 29.0
Mexico 49.5 Jamaica 37.9 Rwanda 28.9
Malaysia 49.2 Latvia 37.7 Slovenia 28.4
Madagascar 47.5 Vietnam 37.0 Germany 28.3
Nepal 47.2 Benin 36.5 Albania 28.2
Guinea-Bissau 47.0 New Zealand 36.2 Ukraine 28.1
Philippines 46.1 Italy 36.0 Finland 26.9
Uruguay 44.9 Lithuania 36.0 Hungary 26.9
China 44.7 United Kingdom 36.0 Uzbekistan 26.8
Cameroon 44.6 Estonia 35.8 Bosnia and Herzegovina 26.2
Côte d'Ivoire 44.6 Algeria 35.3 Norway 25.8
Venezuela 44.1 Australia 35.2 Slovakia 25.8
Ecuador 43.7 Spain 34.7 Czech Rep 25.4
Nigeria 43.7 Lao People’s Dem Rep 34.6 Sweden 25.0
Turkey 43.6 Tanzania 34.6 Japan 24.9
Hong Kong 43.4 Poland 34.5 Denmark 24.7
Guyana 43.2 Egypt 34.4 Azerbaijan 19.0
Units: Index. 0-100; higher numbers indicate greater inequality
Source: The World Bank: Development Data Group 2006

Calculation of the Gini Index
Gini =
+
would be represented by the bisector. and insolvency of many developing

An unequal distribution of the incomes countries, particularly since the 1980s.
leads to a downward curve. The further The foreign debt is the sum of the pub-
a distribution curve is positioned under lic, publicly guaranteed and private
the bisector, the greater the concentra- long-term commitments, loans from
tion of incomes. the International Monetary Fund
As a measure of income concentra- (IMF) and the short-term commit-
tion, the Gini coefficient is used. This ments towards private foreign creditors.
relates the area between the bisector The reasons for the size and struc-
and the actual income distribution to ture of the indebtedness are both inter-
the entire area under the bisector. nal and external. Internal reasons are to
do with the specific circumstances in
REFERENCES: the debtor countries. These include
STOBBE, A. (1966/1994), Volkswirtschafts- particularly import and export depend-
lehre 1: Volkswirtschaftliches Rechnungswesen, encies due to deficient production,
Berlin, Heidelberg, New York.
delayed adjustments to global econom-
ic changes, inefficient use of private and
Jörg Winterberg
public foreign credits, and high public
budget deficits. The high budget deficit
is often as a result of civil war, the
Indebtedness of developing acquisition of arms and luxury goods,
countries the absence of an adequate socio-politi-
cal framework aimed at economic
Indebtedness is shorthand for the eco- growth and social equality, and the lack
nomic and social problems that are of an economic policy focused on sta-
associated with the rising foreign debt bility. Also to be considered here is the
258 Indebtedness of developing countries
flight of capital, legal insecurity and ice in the form of interest on credits and
political instability, as well as the failure repayments as a percentage of the
of those who are politically responsible export revenue) and thus by an acute
(bad governance). debt crisis in many developing coun-
The developing countries are tries. High and rising liabilities arising
unable to influence the external causes from bilateral and multilateral develop-
of their indebtedness directly. Here, the ment aid and trade loans coincided with
key issues are trade restrictions for falling foreign exchange proceeds and
industrial goods and services and the led to international insolvency (e.g. the
agricultural protective system of the temporary termination of payments by
industrialised countries, falling world Mexico in 1982). In many countries,
market prices for important raw materi- the annual debt repayments exceeded
als, worsening terms of trade (the rela- the export revenue. These heavy debts
tionship of the prices of export goods to were putting economic growth and
those of import goods) in the develop- poverty reduction at risk.
ing countries, and rising interest rates in In order to solve this debt crisis, the
the international financial markets. international financial institutions
The high foreign debt was followed embarked on crisis management (the
by rising debt service ratios (debt serv- International Monetary Fund [IMF],
External debt of Heavily Indebted Poor Countries (HIPC) in 2005
Country % of Total in Country % of Total in

GNI current US$ GNI current US$
millions millions
Benin 43.5 1,855 Madagascar 69.6 3,465

Bolivia 71.3 6,390 Malawi 155.6 3,155
Burkina Faso 39.6 2,045 Mali 58.5 2,969
Burundi 169.4 1,322 Mauritania 119.1 2,281
Cameroon 43.6 7,151 Mozambique 82.3 5,121
Central African Republic 74.3 1,016 Nepal 44.3 3,285
Chad 36.8 1,633 Nicaragua 107.3 5,144
Côte D'Ivoire 68.7 10,735 Congo, Rep. 150.8 5,936
Congo, Dem. Rep. 156 10,600 Rwanda 71.3 1,518
Eritrea 76.5 736 Senegal 46.9 3,793
Ethiopia 56.2 6,259 Sierra Leone 144.9 1,682
Ghana 63.6 6,739 Sudan 72.1 18,455
Guinea 100.2 3,247 Tanzania 64.4 7,763
Guinea-Bissau 239.6 693 Gambia, The 64.4 672
Haiti 31 1,323 Togo 78.8 1,708
Honduras 65.9 5,242 Uganda 52.2 4,463
Kyrgyz Republic 86.1 2,032 Zambia 83.3 5,668
Liberia 591.4 2,581
Total Population of HIPC: 554 million

Source: Worldbank, World Development Indicators (WDI) 2007, Table 4.16 External debt
the World Bank and the regional devel- Furthermore, the criteria for what is
opment banks), with the granting of considered tolerable indebtedness for
new loans to the principal debtor coun- HIPC have been lowered. (A debt-
tries being made conditional upon service ratio, expressed as the propor-
growth promoting structural adjust- tion of the annual debt service to the
ment programmes (the Baker Plan). export revenue, of no more than 15%
Since 1989 indebtedness began to and current total debts of no more than
be seen less as a liquidity problem than 150% of the annual export income.)
an insolvency problem, which the com- The HIPC group includes 42 coun-
mercial banks and the governments of tries, predominantly in Africa; in 1996,
the creditor countries tried to resolve by their total foreign debt amounted to
writing off a large proportion of the approximately US$245 billion. At the
debts and/or the debt service (the Brady Cologne G-8-Summit in 1999, it was
Plan). agreed that in the context of the HIPC
The new restructuring programme initiative, debts to the value of up to
drawn up by the IMF and the World US$70 billion would be cancelled. By
Bank takes all creditors’ claims into September 2003, 27 countries which
account and contains transparent, uni- had become eligible for debt cancella-
form rules about how and through tion and whose debts in 2002 amount-
which steps transformation and reform ed to US$77 billion had already had
processes in the insolvent countries jus- US$32 billion written off. In relation to
tify a reduction or cancellation of their 34 countries of the HIPC group, the
debts – as well as which criteria should cancellation of debts would amount to a
be used to determine a level of ‘tolera- total of US$40 billion.
ble’ indebtedness. This formed the For many HIPC, however, indebt-
background of the World Bank and edness remains the key problem in their
IMF Heavily Indebted Poor Countries economic and social development, so
(HIPC) I initiative in 1996 for the most much so that the World Bank and IMF
seriously debt- and poverty-ridden consider that more debt cancellations
countries, and from 1999 for the (‘topping up’) is necessary.
extended HIPC II initiative.
The new feature here is the link REFERENCES:
between debt reduction and the fight MORE DIEKHEUER, G. (2001),

against poverty, which means that the Internationale Wirtschaftsbeziehungen, 5th edi-
tion, Munich; WEED (ed) (2003), Die
poorest countries can decrease their
Umverteilungsmaschine. Finanzmärkte und
debts through national Poverty Re-
Verschuldung, Berlin; WORLD BANK (ed)
duction Strategies (PRS). These strate- (2003), World Development Report 2004,
gies have to be drawn up, implemented Washington, DC; http://www.worldbank.
and kept up with positive results for one org/hipc/.
year under the involvement of broad
sectors of the population (the principle Ronald Clapham
of country ownership). In addition,
three-year structural adjustment pro-
grammes have to be undertaken.
260 Individual responsibility
Individual responsibility career or another does not mean that a

certain →income is permanently guaran-
Individual responsibility means that teed. It does not even mean that the
everybody is personally accountable for income depends exclusively on one’s
his/her actions and for the conse- own conduct. It is true that the bank-
quences which result from those ruptcy of an entrepreneur who through
actions. negligence allows infrastructure to
become outdated or who does not carry
Individual responsibility within the out adequate cost controls is seen as
sphere of free market activity being at fault. But it is equally possible
The principle is universally accepted in that he/she is pushed out of the market
those cases where an action and the through no fault of his/her own because
consequence of the action are closely new competitors with innovative,
interrelated. Examples are direct patented products have entered the
injuries of the right to freedom of oth- market (→open markets: market entry,
ers and the fulfilment of contracts: market exit).
someone who violates the personal The situation is similar regarding
freedom of another is adding non- the employee. Employees may be made
material damage (damage to reputation) personally accountable for their dis-
to material damage (property damage) missal due to dereliction of duty on the
or physical damage (bodily injury). job. This does not apply if despite dili-
Here, it is a fundamental legal prin- gence and commitment they are dis-
ciple that perpetrators are responsible missed because the employer is cutting
for the damage they have caused and are jobs due to rationalisation, or is going
therefore required to make amends. into liquidation.
Likewise, it applies that someone who In the relationship between per-
has entered into a contract is basically formance and success, besides individ-
responsible for the fulfilment of the ual knowledge and abilities, many
contractual obligations. If not, the other imponderables, as well as coincidence,
contracting party can claim compensa- play an important role. In a →market
tion. economy remuneration does not exclu-
In other areas, however, the connec- sively depend on the performance and
tion between action and consequence personal commitment of the entrepre-
of the action is less obvious. This is the neur or employee, but on an anony-
case above all when a market participant mous evaluation of their performance
suffers a loss of income without being by the market.
conscious of being at fault. Here, too, In the event of the →entrepreneur or
the principle of individual responsibili- the employee losing their occupation
ty applies. through no fault of their own, general-
When it comes to choosing an occu- ly no one else can be made accountable.
pation, some individuals will decide in An employment contract does not
favour of independence while others guarantee permanent employment; not
will prefer to work for an employer. Yet for the employer and especially not for
deciding to embark on a particular third parties, for instance, the business
partners of the employer. Therefore it takes on their responsibility. Second,

each person has to carry the conse- people will increasingly expect others to
quences of his/her economic actions take care of specific problems. People
even if his/her efforts have failed become less and less prepared, or even
through no fault of his/her own. forget, to take on responsibility.
Since those who are directly affect- The striving for individual irrespon-
ed – the entrepreneur’s new competitor sibility thus not only leads to a displace-
or the employee’s employer – cannot be ment of responsibility in the communi-
forced to make amends, one could say ty but in this way in the long run also to
that it was up to society to save the its removal. In the long term, this leads
enterprise or the jobs from destruction. to the destruction of the foundations of
But this is also wrong. Society can only a free social system and, concomitantly,
make good for the failure of individuals of the social market economy. A society
by distributing the resulting burdens whose members feel neither responsi-
among the rest of the people – because bility for themselves nor for the com-
they are not prepared to do this volun- munity cannot survive.
tarily, it has to be done by force. This
sort of force is, however, an inadmissi- REFERENCES:
ble interference with personal freedom. EUCKEN, W. (1990), Grundsätze der

It follows that the individual liberty of Wirtschaftspolitik, 6th edition, Tübingen, pp.
279-285; HAYEK, F. A. VON (1991), Die
all citizens in all its aspects can be
Verfassung der Freiheit, 3rd edition, Tübingen,
upheld only if it is connected with an
pp. 89-104.
equally all-encompassing responsibility
for one’s own fate. Thus, in the free Lüder Gerken
market system individuals have to carry
the consequences of their economic
actions even if they are not to blame for
the failure of their efforts. Industrial action
Consequences of the collectivisation of Bargaining autonomy, which rests on

accountability the constitutionally enshrined freedom
For a society in which the citizens can of coalition, will function only if some-
relinquish their individual responsibili- thing close to a balance of power (coun-
ty to the community, there will be con- terweight principle) exists between the
sequences in the long term that go far trade unions and the employers’ associ-
beyond the violation of the right to per- ations in their capacity as bargaining
sonal freedom which is present in each partners.
individual case. Since collective bargaining is both
First, due to the continued shifting about common goals (such as the
of responsibility on to society, personal preservation of competitive ability, par-
liberty in the society is displaced more ticularly with regard to the allocation of
and more by the power of a social col- →profit to the factors labour and capital)
lective, which has to deprive people of and also about diverging interests, both
their liberty to the same extent to which sides must have an equal chance to gain
262 Industrial action
the upper hand without one side being dormant and resumes its existence
in a position to dictate to the other. thereafter (suspending effect). In prac-
Strikes or lockouts can help in bringing tice it is first and foremost the trade
about an acceptable compromise if all unions which depend on the right to
else fails. strike, since they, as a rule, make the
A strike is defined as an organised demands. Without it, acceptable →col-
collective downing of tools by either a lective agreements would not be guaran-
part or all of the workforce for the pur- teed.
pose of forcing the employers, through Before making use of the labour dis-
the losses incurred, to give in to the pute instruments at their disposal,
union’s demands. The employer or union leaders are obliged to hold a so-
employers concerned can react to this called strike ballot and to take the readi-
confrontational measure with a lockout. ness of their members to strike into
This entails closing the business and account. But the union leaders also
temporarily halting the payment of have to consider the economic conse-
wages and salaries. Thus, on the union quences, since they are liable for the
side, the threat potential consists in the payment of so-called strike benefits in
withdrawal of the workforce, while on lieu of their members’ wages.
the employers’ side it rests in the refusal In order to achieve their aims as eas-
of wage payments. ily and quickly as possible, trade unions
During labour disputes the em- are eager to stage labour disputes only at
ployee–employer relationship becomes the most sensitive times and places in
Rules for industrial action

the production process. With increasing The existence of a collective agree-

production dependence on deliveries of ment that is either still in force or has
manufactured components, the scope been reinstated is the only scenario
for industrial action has widened con- where no labour dispute measures may
siderably. The expansive enforcement be taken (obligation to keep the peace),
strikes that used to be quite frequent – but even in the case of so-called wild-
often countered by blanket lockouts cat strikes, staged while current collec-
from the employers’ side – have now tive agreements are still valid, judicial
largely been replaced by relatively brief decisions are often ambivalent. In any
and geographically limited point strikes. event, the interpretation of the law
This notwithstanding, Germany, which considers strikes to be an integral
together with Austria and Switzerland, part of the bargaining autonomy also
has one of the lowest strike frequency believes that they should not be used to
rates in the world. promote general political goals but only
Since labour disputes can inflict in the specific context of trade union
great losses on the economy and may be agreements.
the reason why delivery agreements are Furthermore, labour dispute meas-
not kept, the readiness of the →social ures have to take place fairly and should
partners to compromise has extreme sig- only target those who are directly
nificance for the international competi- involved. Political strikes and solidarity
tiveness of a country. Nevertheless, strikes are therefore absolutely forbid-
contrary to most other industrialised den. Likewise, the extent and intensity
countries, the right to engage in labour of the respective labour dispute meas-
disputes is not legally regulated in ures must be appropriate (principle of
Germany. Instead, the legal framework social appropriateness).
around actual labour disputes consists
of action guidelines that are often vague REFERENCES:
and based on decisions taken in specific RIEBLE, V. (1996), Arbeitsmarkt und

cases in the Federal Labour Court and Wettbewerb. Der Schutz von Vertrags- und
Arbeitsrecht, Berlin, Heidelberg; KELLER, B.
in the Federal Constitutional Court.
(1997), Einführung in die Arbeitspolitik.
Over the years, this way of updating
Arbeitsbeziehungen und Arbeitsmarkt in sozial-
the code of law through so-called wissenschaftlicher Perspektive. Munich, Vienna.
Judge’s Law has changed direction
many times. In the 1950s and 1960s, for Hans Jürgen Rösner
instance, the Supreme Court held that
labour dispute action should only be the
last resort after all possibilities for nego-
tiation had been exhausted (ultima ratio Industrial policy
principle). Today’s jurisdiction by con-
trast tends to consider token strikes of The term ‘industrial policy’ has never
limited duration and participation, run- been clearly defined, which means that
ning concurrently with negotiations, as it is continually exposed to heated polit-
more conducive to the swift conclusion ical and scientific debate. What all
of a new collective agreement. attempts at a definition have in com-
264 Industrial policy
mon, however, is undoubtedly the fact make them the main target for the crit-
that industrial policy refers to the imple- icism of liberal economists.
mentation or omission of government Without necessarily focusing on the
interference with the functioning of the individual branches of industry, indus-
industrial sector in a market economy trial or structural policy essentially can
(→interventionism). In this sense, indus- focus on the preservation, adjustment
trial policy is the sum of all government or organisation of industrial structures.
measures that result in the politically These goals are inherently different in
intended organisation of industrial character. Structural preservation and
structures. structural adjustment are described as
Even in a →market economy, interfer- passive or defensive policies; structural
ence with the market process represents organisation, by contrast, as an active or
an important field for economic policy offensive policy.
activities. If the objective of an econom- At least implicitly, against the back-
ic policy is to increase overall economic ground of increasing unemployment,
welfare, then the industrial policy must the required political interventions are
optimise the contribution by the indus- largely implemented in the hope of sav-
trial sector to the total welfare. ing existing jobs or creating new ones.
The scientific demarcation of the The efforts to preserve declining or
term is also difficult because a defini- shrinking industries – possibly due to a
tion of the industrial sector is not with- special regional significance or in the
out its problems. This is due to the attempt to gain autonomy (agriculture,
increasing overlap between the three coal mining) – make this immediately
economic sectors of agriculture, indus- clear.
try and services. The differing interpre- The policy of structural adjustment,
tations are therefore located anywhere however, is supposed to facilitate the
between a →structural policy with its necessary structural transformation of
point of reference in industry (second- the economic production processes
ary sector) and the inclusion of all gov- (e.g. privatisation within the areas of
ernment interventions (inclusive of the telecommunication and electricity).
primary and tertiary sectors), aimed at The organisational part of industrial
manipulating the development of policy is meant to go further by identi-
industrial structures which have result- fying potential growth sectors and by
ed from market processes. providing these very sectors with the
There is a large variety of practical available resources (space travel, bio-
measures that can be used to this end. technology).
Examples are →subsidies, tax rebates, One is equally forced to concede
government investments (government that the preservation of industries – as
commissions), material or non-material desirable as this may happen to be from
business start-up assistance and secured a regional perspective – ties up re-
loans. These instruments which distort sources in shrinking industries in the
the results of free competition are gen- long term, which are then not available
erally referred to by economists as for growth industries that have evolved
‘process policy’ actions. This tends to from the market itself. Declining
growth and job losses are the immedi- tain measure of solidarity. This makes it
ate consequences, mostly without being a crucial task to help those who are
recognised as such. This criticism also temporarily or permanently, not yet or
concerns adjustment grants. Originally no longer, able to succeed in a compet-
conceived as temporary measures, they itive environment. This, however, can-
have a habit of becoming permanent. It not be the task of the industrial or
is extremely difficult to terminate assis- structural policy, as the social market
tance, once approved, against the will of economy does not want to endanger the
the recipients (subsidies for theatres or basis of a redistribution in favour of this
orchestras; agriculture). group of people. Assistance for eco-
Efforts to focus on the promotion of nomically weak individuals is the
specific so-called growth industries are responsibility of a →social policy (mini-
faced with the evolutional character of mum income, government transfers in
the economic process. The tangible the form of subject promotion) and not
successes of competitive markets tend of an industrial policy.
to have resulted from a multiplicity of Industrial policy has to serve to
individual decisions and definitely not create the necessary conditions for an
from central planning on the basis of a optimal allocation of resources across
politically motivated target. This makes the market under equal conditions for
a reliable medium- or even long-term all economic agents, without interven-
forecast of concrete competitive results tions in the economic process by the
impossible. state.
It follows for this reason that struc-
tural organisation policies usually have REFERENCES:
to resort to what seems plausible, there- BRÖSSE, U (1999), Industriepolitik, 2nd edi-
by running the risk of false estimates tion, Munich, Vienna; EICHNER, S.
which can lead to the squandering of (2002), Wettbewerb, Industrieentwicklung und
Industriepolitik, Berlin; GÖRGENS,
limited resources. In addition, the
E./THUY, P. (1997), Beschäftigungs-
selective promotion of individual
wirkungen industriepolitischer Maßnah-
industries is associated with the dis- men in der Bundesrepublik Deutschland,
crimination of industries and enterpris- in: Behrends, S. (ed), Ordnungkonforme
es that are not subsidised. Wirtschaftspolitik in der Markwirtschaft, Berlin,
Even in a →social market economy, pp. 377-396; HAYEK, F. A. von (1968), Der
industrial and structural policy has to Wettbewerb als Entdeckungsverfahren, Kiel;
take the evolutional character of com- OBERENDER, P./DAUMANN, F. (1995),
petitive processes into account. It Industriepolitik, Munich.
should therefore be content with creat-
ing an environment conducive to Peter Oberender
growth and employment (infrastruc- Stephan Ruckdäschel
Thomas Rudolf
ture, a competitive system under the
rule of law, the guarantee of private
property and freedom of contract).
One of the important characteristics
of the social market economy is a cer-
266 Industrial relations constitution
Industrial relations constitution involved in economic and business

decisions. The powers of the works
Germany’s Industrial Constitution Law councils are limited to the legally desig-
(Betriebsverfassungsgesetz) regulates rela- nated areas. Apart from the right to
tions between the employer and the information there are special nomina-
employees of a business. The staff is tion, hearing and consultation rights.
represented by the works council, Nomination rights refer to personnel
which has institutionalised participa- planning and the promotion of profes-
tion rights. The Industrial Constitution sional training. Hearing rights are
Law applies to enterprises with at least granted in situations of notice being
five permanently employed employees. given by the employer.
The size of the works council depends Consultation rights are granted in
on the number of employees; while respect of personnel planning, profes-
part-time workers are taken into sional training and the layout of the
account, members of the executive staff workplace, and before planned opera-
are not. Workers and employees must tional changes. In some circumstances
be proportionally represented on the specified by the law, the works council
works council. has genuine rights of →co-determination.
Works councils with more than nine These concern above all the regulation
members (in companies of over 300 of working hours, the manner in which
employees) constitute an operating remuneration is paid, vacation plan-
committee that deals with current busi- ning, the use of technical equipment
ness. In companies with several branch- and health and safety issues.
es, a total works council is to be formed. Apart from informal agreements
Within a company with legally inde- regarding regulations, works councils
pendent →enterprises, a company works and employers can also sign written
council can be established. There are employment agreements. Like collec-
special representation bodies for young tive agreements, employment agree-
people and trainees in companies with ments apply directly to all employees;
at least five trainees or employees under individual contractual deviations are
18 years. In companies where at least permissible only in favour of the
five severely disabled persons are on the employee. Employment agreements
staff, this group selects a shop steward. can regulate all operational affairs, as
The Industrial Constitution Law long as there are no legal obstacles.
applies only to companies that are con- Collective agreements are given prefer-
stituted under private law; for the pub- ence over employment agreements.
lic service, the Personnel Represen- The parties to a wage agreement can,
tation Law applies. In enterprises that however, specifically authorise differing
are focused on, for example, political, employment agreements.
charitable, religious or educational Works councils are not authorised to
objectives, the rights of the staff repre- participate in business decisions; only
sentatives are limited. proposed operating changes with sub-
The Industrial Constitution Law stantial disadvantages for the staff may be
does not entitle staff to become discussed. In such a case, the works
council can insist on a social plan intend- Among the forerunners of the con-
ed to moderate and alleviate the eco- temporary ‘new institutional econom-
nomic disadvantages for the employees. ics’ are the older American institution-
A works assembly has to be sched- alism, the German historical school and
uled by the works council at regular ordo-liberalism. Within the new insti-
intervals; it only serves for information tutional economics there are different
and debate. The same applies to the areas of research, of which the princi-
youth and trainee assemblies, which – pal-agent theory, the governance cost
in contrast to the works assembly – are theory, the property rights theory
not mandatory. (which includes a legal analysis) the
For companies that are active in sev- public choice theory, constitutional
eral member states of the European economics, as well as the history of the
Union, an EU guideline envisages the economy and its institutions are the
implementation of a European works most important. A brief discussion of
council. However, a voluntary agree- each of these areas follows.
ment on the implementation of a Euro- Modern economic systems are
pean worker representation council has based on a greatly differentiated divi-
priority over a legally formed European sion of labour. For almost any task there
works council, which will be constitut- is a specialist who has the ability, inside
ed only if a negotiated solution between a closely limited area of expertise, to
employees and employers fails. solve the most difficult problems. In
other areas, however, he/she usually has
REFERENCES: only little know-how or none at all.
FABRICIUS, F./KRAFT, A. (1977), This is why a large number of special-
Betriebsverfassungsgesetz, 6th edition, ists are involved in the production of
Neuwied; FITTING, K./KAISER, H./
goods, e.g. cars. Their cooperation has
HEITHER, F./ENGELS, G./ SCHMIDT,
to be well organised in order to result in
I. (2000), Betriebsverfassungsgesetz, 20th edi-
tion, Munich; SCHAUB, G. (1995), Der
goods and services that can hold their
Betriebsrat, 6th edition, Munich. own against the →competition. There are
actors participating in such cooperation
Gernot Fritz who initiate the realisation of projects,
and others who are appointed to see the
projects through. In economics, the
former are referred to as principals, the
Institutional economics latter as agents.
A fundamental problem consists of
Institutional economics concerns the the fact that a principal can achieve a
way in which institutions restrict high-quality production only if the
human actions. Institutions are defined agent’s work meets the standards of the
as long-term contracts, organisations, principal. This is a serious practical
formal rules such as laws and constitu- problem because the principal cannot
tional regulations and informal rules supervise the agent perfectly. On the
that are not tied to a specific form such one hand, he/she cannot do this be-
as ethics, customs and habits. cause gathering information is expen-
268 Institutional economics
sive in itself. It requires time, which is which is of immense importance to the

then no longer available for other specific project, but which is of little
things. But even if the principal was value for anything else.
able to see everything the agent gets up In an extreme case, he/she may re-
to, he/she would still not always be able equip his/her entire machinery to
to judge the activities correctly. ensure that the manufacture of a certain
If we observe, for example, engi- large order can be completed on time
neers at work we still don’t know and satisfy the agreed quality standard.
whether they are doing their work well Clearly, this kind of special effort is
or not. The agent tends to be better worthwhile only in the case of an
informed because in practice the gath- exceptionally profitable project. But
ering of information, negotiations and even then there is the risk that a partner
supervision cost money – the so-called is exploiting the specialising trade part-
transaction costs. He/she can use this to ner. The partner is obviously aware that
the principal’s disadvantage. the specialisation has led to a depend-
That is, for example, the case if ence and will gradually try, through
managers who are also agents tell the skilful negotiation, to turn this to
shareholder-principals that they require his/her advantage. If, however, the spe-
an enormous budget as well as several cialising trading partner suspects such
secretaries and company cars, although exploitation practices, he/she will
the quality of their work would not suf- demand securities or he/she will in
fer if they had only half the amount of extreme cases reject participation in the
equipment. This in turn can lead to project. In this case, an investment,
projects not being carried out, although which would in theory benefit every-
they would benefit both the principal body, is not actually made at all.
and the agent because the principal does Against this background, the gover-
not want to run the risk of being nance cost theory deals with ways of
exploited. defusing, through skilful contract
Against this background, the princi- design or organisational changes, the
pal-agent theory is concerned with the dangers of exploitation inherent in spe-
question of how contracts can be cialisations which have been discussed
arranged in such a way that the agent is so that investments can be made rela-
motivated by the kind of remuneration tively safely and to mutual advantage.
or other incentives to carry out tasks to As well as contracts and organisa-
the principal’s satisfaction. tions, legal regulations also serve to
The governance cost theory relates to secure productive exchanges. It is only
a similar issue – mainly contractual and the existence of reliable rules that
organisational solutions which help to enables people to sign mutually benefi-
secure investment projects. When cer- cial contracts. Absolute freedom – a
tain investment projects are put into state of anarchy in which everyone can
practice, it is quite common that one of do what he/she wants – is just as unpro-
the partners to the deal has to specialise. ductive as comprehensive central plan-
That means that he/she contributes ning, which gives the individual no
something to the investment project space whatsoever.
Progress in the form of new prod- tions considerably. If the social institu-
ucts and procedures, which the con- tions are such that innovations and
sumers demand, can come about only if investments appear worthwhile to the
the law guarantees free and fair compe- experimenting participant, the number
tition. ‘Fair’ in this case means, on the of technical innovations in a society will
one hand, that the state provides accept- rise. Exactly the opposite is the case if
able rules relating to competition there are no financial incentives for the
(monopoly and antitrust law) and, on potential innovator to convert ideas into
the other, that the competitors are innovations due to the nature of the
restricted to the use of such instruments social institutions.
that do not have unwanted repercus- Apart from this theory, the economic
sions for third parties (so-called exter- history of institutions examines the
nalities). question of how differently formal and
Property rights theory and the eco- informal institutions (written laws and
nomic analysis of the law deal with unwritten ethical rules as well as cus-
questions such as how the rights of toms and habits) adapt to changing con-
action or disposal should be organised ditions of scarcity and how prosperity is
for the participants in order to eliminate affected by such changes.
or reduce externalities effectively and Although these areas of institutional
economically. Competition prevails not economics are based on different epis-
only on goods markets but also in the temological concepts, they share the
political sector. Here, the question assumption that economic agents are
whether the competition between greatly affected by their institutional
politicians and other public servants environment.
(the political agents) leads to the results Institutions reduce transaction
which the citizens (the principals) costs, create safe expectations and
desire, equally depends on the institu- enable the economic participants to
tions. benefit from various commercial
Public choice theory (the theory of advantages. This makes the improve-
public decision-making processes) has ment of the institutional framework,
helped to make it clear that politicians both economically and politically, an
do not automatically act as servants of ongoing task of the highest urgency.
the people, but that they need to be
motivated to represent the will of the REFERENCES:
people through democratic control and ERLEI, M./LESCHKE, M./SAUERLAND,

other incentives. D. (1999), Neue Institutionenökonomik,
Stuttgart; RICHTER, R./F URUBOTN,
Constitutional economics concerns
E. (2003), Neue Institutionenökonomik, 3rd
itself with the next question, which is
edition, Tübingen.
how productive (constitutional) restric-
tions for political agents should be Martin Leschke
implemented. Institutional economic
history assumes over time institutions
go through different phases, affecting
the prospects of profit-yielding innova-
270 Institutional order policy (Ordnungspolitik) and process policy
Institutional order policy without requiring many process policy

(Ordnungspolitik) and process interventions. Process policy interfer-
policy ence with the market process (→inter-
ventionism) should take place only if the
Economic policy is the generic term for self-regulating forces of the market are
all state activities implemented in order either not functioning at all or only par-
to organise and control (or to steer) the tially functioning, meaning that →com-
economy in line with political objec- petition between suppliers and buyers is
tives. A distinction has to be made not yielding the results expected by
between two areas of economic policy: society.
institutional order policy and process The concept of the →social market
policy. economy sees a need for process policy
Institutional order policy aims at measures to correct market results
achieving the desired economic order. which are not in line with the socio-
To this end, a general institutional political goals of society (such as
framework has to be put in place to income redistribution in favour of
coordinate all the individual economic groups of disadvantaged persons, inter-
activities in such a way that an econom- ference with the pricing of health serv-
ically integrated process results, which ices, →social policy).
will produce the best possible outcome Institutional order policy-makers
for society as a whole. The economic are called upon to create a solid system
processes themselves and their results of rules – preferably embedded in the
are influenced and controlled by legal system and applicable and, if nec-
process policy. essary, enforceable in the economic
An economy which depends on a process – and to arrange them into an
highly specialised division of labour appropriate legal framework. Institu-
cannot survive for long without an tional order policy gets to grips with the
organised order. At the same time, there nitty-gritty of the way the economic
is considerable room to manoeuvre process should be planned and coordi-
when it comes to the actual detail of the nated, but it is also responsible for the
institutional order policy. Over the past constitutional status of private property,
several decades, these have been budgets, enterprises and markets.
exploited in practice with uneven Furthermore, it deals with detailed
results (such as the socialist central aspects of the →financial constitution, the
planned economies in the Soviet Union →monetary order as well as the increas-
and East Germany [GDR], the compet- ingly important foreign trade institu-
itive →market economy in the United tional framework.
States and the →social market economy in In addition, in a social market econ-
West Germany [FRG]). omy, the institutional order for social
In decentralised, competitive mar- security plays an important role. The
ket economies, the main task is the main responsibility for shaping a well-
creation of a good economic system conceived economic system (order) is
(order): the economic order should run the legislative power. Since institutional
smoothly and benefit society as a whole order policy interventions have a signif-
Institutional order policy (Ordnungspolitik): Exemptions from competition rules 271
icant impact on the quality of the eco- of the municipal factor of business tax
nomic system, the different measures or a temporary driving ban during
ought to be designed for the long term, smog.
thus putting planning on a firm founda- In its practical application, econom-
tion. Frequent and sudden changes of ic policy does not always make a clear
these fundamentals that matter to the distinction between institutional order
economic agents make planning more policy and process policy, because eco-
difficult and confuse investors. nomic or social policy goals can be
Process policy, however, interferes attained either through the implemen-
with the economic processes at the tation of a general institutional frame-
heart of the established economic order. work or through direct process inter-
Areas where process policy actions ventions. However, when dealing with
might be implemented are goods or economic decisions and their practical
factor markets, as well as specific indus- consequences, it must also be remem-
tries (such as mining, agriculture) or bered that the growing number of
the entire economy (such as price lev- process interventions is usually accom-
els, →employment, income distribution). panied by more and more government
The main actor in process policy is directives and red tape. This leaves less
the executive (governments, authori- room for individual economic deci-
ties, the central banks, monopoly com- sions, possible innovations and the sort
missions, etc.), which seeks to influ- of flexibility that is characteristic of suc-
ence processes and their outcomes in cessful market economies (→market
the short or medium term, for example, economy and public institutions; →interven-
through market price fixing, changes to tionism).
taxation and interest rates or transfer
payments. Frequently, however, these REFERENCES:
process interventions lead to distorted BERG, H./CASSEL, D./HARTWIG, K.-H.

factor allocations and unwanted process (2003), Theorie der Wirtschaftspolitik, in:
Bender, D. et al, Vahlens Kompendium der
results, which in turn make new inter-
Wirtschaftstheorie- und Wirtschaftspolitik,
ventions necessary (intervention spi-
Munich, pp. 171-295; THIEME, H. J.
rals). (1994), Soziale Marktwirtschaft. Ordnungs-
Concrete examples of institutional konzeption und wirtschaftspolitische Ausgestaltung,
order policy measures are the creation 2nd edition, Munich.
of an autonomous central bank which is
largely independent of political deci- Hans Jörg Thieme
sions, the introduction of →occupational
health and safety laws, the abolition of the
law regulating trading hours or new leg-
islation on an environmental tax reform. Institutional order policy
Examples of process policy inter- (Ordnungspolitik): Exemptions
ventions are the amended regulations from competition rules
regarding the different ways of obtain-
ing tax relief on investments, permis- In a market economy, the government
sion to trade on Sundays, the variation has the important responsibility for
272 Institutional order policy (Ordnungspolitik): Exemptions from competition rules
drawing up a code of general rules for everything from medicines to the free
the market participants. Within this professionals could be added.
institutional order framework, all the All these special provisions consti-
economic agents have their own agen- tute breaches of market and competi-
das and take action accordingly. The tion regulations. Government interven-
decentralised coordination of all this tions render market price mechanism
individualised planning occurs by way either totally or partly ineffectual; this is
of the market price mechanism, while generally known as state intervention
the competitive process (→market mech- (→interventionism) and means direct
anism) keeps the market participants in control of the economic activities in
check. But in all free market systems certain sectors of the economy by gov-
there are a number of economic sectors ernment institutions or their represen-
that require special regulations because tatives. Important examples are state
they deviate more or less strongly from regulations controlling market entry
these general basic principles. Such sec- (→open markets), prices, production and
tors exempted from general competi- sales volumes, investments and capaci-
tion rules continue to be a feature of the ties, as well as quality and terms.
German →social market economy. Legal exemptions from the ban on
Agriculture is a classic example. cartels and special competition policy
Every year, the European Union minis- regulations should not be classified as
ters of agriculture agree on intervention measures of government regulations.
prices for the European agricultural They are instrumental in releasing cer-
commodities markets. In addition, certain sectors of the economy either
tain agricultural products are subject to entirely or partially from the general
fixed production limits or quotas regulations of the →Act Against Restraints
(→agricultural policy). In certain cases, of Competition. The partial exemptions
German farmers are entitled to run car- refer to the following regulations or
tels and fix prices and trading condi- prohibitions of the Act Against
tions vertically (with suppliers or cus- Restraints of Competition:
tomers), despite the fact that this is in
principle not allowed in Germany. • the prohibition of cartels and price
Further areas exempted from com- fixing;
petition include network-based sectors
of the economy such as the public elec- • the ban on price recommendations;
tricity supply, water supply, railways, and
post office and telecommunications.
Here, market newcomers generally • monitoring of abuse in cases of exclu-
require an official permit to operate as sivity commitments of customers
network or service providers. More or towards certain suppliers.
less the same thing applies in most of
these sectors with regard to the way The economic sectors currently
enterprises determine their prices. enjoying these privileges include the
Further special regulations in other water boards, agriculture, the finance
areas of the economy that encompass and insurance industry, copyright com-
panies and the sports sector. If the state post office, the railways, grid-based
is prepared to issue area-restricted power supplies) and almost all antitrust
exemptions that grant special permis- exemptions were unjustified.
sion for private restrictive trade prac- In order to be able to answer the
tices while they are prohibited in the question why economically unjustified
remaining areas, then a direct, govern- special regulations are introduced and
mental restraint of competition is the allowed to remain in place, one has to
consequence of selective special per- look to the →‘new political economy’. If
missions. one assumes that there is a market for
Industry characteristics are cited as special arrangements where politicians
the official justification for competition as suppliers and entrepreneurs with
policy exemptions. Reference is made their employees act as customers, then
to characteristics of the respective one will understand why special regula-
enterprises, production processes, tions exist. They particularly depend on
goods or marketing conditions. Critical variables such as the type of entrepre-
examination reveals, however, that in neur (innovative, passive), cost and
the majority of cases the listed charac- supply, the type of market (many or few
teristics do not represent a sufficient market participants), market phases
reason for special government regula- (growing, saturated markets), as well as
tions and exemptions from antitrust authority structures (→interest groups,
regulations. lobbies). But the theory also explains
A deeper economic analysis is more why since the middle of the 1990s a
convincing. Special exemptions from large proportion of the failed special
competition rules are justified only if regulations and antitrust exemptions in
genuine malfunctions of the competi- Germany have been abolished.
tive market process arise in the form of Considered in detail, it becomes
market or competition failure. Market obvious that economic losses alone will
failure occurs when the coordinating not make the →deregulation of unjusti-
mechanism of the market fails to kick fied special regulations politically
in, such as when prospective buyers of acceptable. Further decisive factors
certain goods (public goods) are not have to be present, such as European
prepared to pay a price, with the result →integration, →globalisation or certain
that the producers cannot replace their technological innovations. But con-
expenses (→public expenditure; →public comitant with the process of deregula-
enterprises). Competitive failure occurs tion, which will not be complete for a
when the competitive process leads to a long time to come, there have been
deterioration of market results (such as plausible macroeconomic calls for new
in the case of natural monopolies or regulatory bodies (re-regulation).
destructive competition). These are expected to be helpful in
A detailed economic analysis shows forcing market openings in certain net-
that the greater proportion of special work industries (telecommunications,
governmental regulations which existed post office, railway, power supply), and
in the early 1990s in Germany failed (in in stimulating competition in the sec-
the areas of telecommunications, the ondary markets by means of non-dis-
274 Integration
criminatory network-user prices and the forefront of technical progress, to

conditions. This shows that the institu- improve their management efficiency
tional policy on special regulations does and to acquire the knowledge they need
move in just one direction. to supply more foreign markets.
Critics of such agreements, howev-
REFERENCES: er, see the danger that the participant
EICKHOF, N. (1985), Wettbewerbs- states cut themselves off from the rest
politische Ausnahmebereiche und staatliche of the world and obstruct the interna-
Regulierung, Jahrbuch für Sozialwissenschaft,
tional division of labour. If this hap-
36, pp. 63-79; — (1993), Zur Legitimation
pens, global market prices lose their
ordnungspolitischer Ausnahmeregelungen,
Ordo, 44, pp. 202-222; — (1997), Staatliche
function as indicators for the factors of
Regulierung und kartellrechtliche production; retail prices tend to be
Branchenfreistellungen, Wirtschaftswissen- higher than those in comparable inter-
schaftliches Studium, 26, pp. 562-567. national markets, in order to protect
products that are globally no longer
Norbert Eickhof competitive. For this reason, regional
economic areas are expected to adopt a
liberal trade policy (open trade with
Integration third states), which simultaneously
promotes their integration into the
Economic integration is defined as the world economy.
opening of national economies to Integration and the →social market
transnational cooperation with other economy complement each other.
countries, mostly in the same region. Markets that are opening up and prices
The intergovernmental agreement is and markets that are becoming more
characterised by the fact that interna- realistic due to competition (→open
tional trade intensifies (trade creation) markets: market entry, market exit) suit the
and that the exchange of goods and nature of a social market economy.
services with third states (non-integrat- Integration can – and this is also a
ed states) is redirected in favour of the requirement of the social market econ-
members (redirected trade). omy – ensure that the factors of pro-
Another consequence of the inte- duction are put to optimal use, increase
gration of national economies is the fact prosperity and secure full employment.
that short- and long-term capital move- It helps social market economies to
ments between the countries increases move forward if, in step with expanding
markedly. Provided the necessary insti- technical advances, regional integration
tutional and legal framework has been also brings about innovations.
put in place, integration also gives The social market economy forces
workers more mobility and facilitates workers and businesses to abandon
the exchange of commercially protected unprofitable jobs and places of produc-
and economically useful knowledge. tion which are no longer competitive.
Due to the harsher →competition in a But at the same time the social market
much larger market, →enterprises in the economy is expected to assist such
member states are encouraged to stay at adjustment processes by enabling
Integration 275
employees and enterprises, through Article V of GATT, and among them 14

short-term, specialised training courses, under participation by the →EU.
to increase productivity and to offer Integration in its extent, form and
their services successfully to the mar- organisation depends, among other
kets (→structural policy). things, on the performance level of the
Such considerations are reflected in economy, on the availability of factors
the rules for economic unions in the of production and on the readiness of
General Agreement on Tariffs and the member states to cooperate. Areas
Trade (GATT). Article XXIV of GATT of preference or associations are charac-
permits the formation of customs terised by the fact that the members
unions or free trade zones, provided grant each other special tariffs. If the
that the tariffs are not higher in relation member states have agreed on exemp-
to third states than the tariffs for the tion from customs duties, a free trade
member countries used to be before the zone is formed. If common external
establishment of the customs union or tariffs are determined in relation to
the free trade zone. Beyond that, it is third states, it is referred to as a customs
necessary to specify a schedule which union. If factors of production enjoy
regulates the form and content of cus- freedom of movement between the
toms duty lowering procedures. states, a (common) domestic market
Since the adoption of the 1994 has been created. If the member states
Marrakesh Agreement, relative to the agree on a common/harmonised eco-
exchange of services within free trade nomic policy, it is an economic com-
zones or customs unions, Article V of munity or an economic union. A com-
GATT requires that third states are not mon currency is the basis of a monetary
to be discriminated against, and/or that union. If the member states also decide
existing obstacles to the market access to share national organs and sets of
of enterprises in third states are to be rules in joint mechanisms and legisla-
eliminated. tion, economic and political integration
Every customs union and every free will be complete.
trade zone has to be approved by the The EU example shows that inte-
World Trade Organization (WTO). If gration on a free market basis can deep-
unions violate the rights of third states, en the process of integration and attract
they have the possibility of having the more members. The quick collapse of
discrimination removed through an regional cooperation in centrally man-
arbitration procedure at the WTO and, aged economies – as in the case of the
if necessary, of forcing compensations Council for Mutual Economic Cooper-
for losses sustained. According to WTO ation (Comecon) – demonstrates the
data, between 1958 and 2003, 143 free weakness of such economic systems
trade agreements/customs union agree- and the risks inherent in non-free mar-
ments in terms of Article 24 of the ket integration. These integrations are
WTO were approved. In 37 of these of a purely political nature, since in a
agreements, the European Union (EU) centrally managed economy the econo-
is co-signatory. Twenty-seven service my is centralistic and politically organ-
agreements were approved in terms of ised (→socialism/planned economy).
276 Interest groups, lobbies
REFERENCES: traditional profit-oriented groups and

FRANKEL, J. A. (ed) (1998), The non-profit oriented groups, which are
Regionalisation of the World Economy, Chicago, growing in number. They range from
London; INTERNATIONAL BANK FOR
conventional trade unions and confed-
RECONSTRUCTION AND DEVELOP-
erations for employers, industries, pro-
MENT (2000), Trade Blocs. Oxford; PANA-
GARIYA, A. (2000), Preferential Trade
fessions and farmers, to city alliances
Liberalisation: The Traditional Theory and and taxpayers’ associations all the way
New Developments, in: Journal of Economic to groupings with philosophical, social
Literature, 38, June, pp. 287-331. or environmental orientations. In
Brussels there are more than 6,000 dif-
Karl Wolfgang Menck ferent organisations representing inter-
est groups. Lobbyism is becoming
increasingly professional, i.e. public
Interest groups, lobbies relations agencies as well as legal and
consulting firms get themselves
Interest groups are part of the phenom- appointed as lobbyists and, with their
enon of today’s democracies and are know-how make themselves indispen-
firmly embedded in the modern indus- sable in the political decision-making
trialised society. Interest groups used to and legislative processes.
meet the members of parliament in the
vestibule of the British House of Why do these interest groups exist?
Commons, the so-called lobby, in order ‘New political economics’ sees the
to discuss legal regulations and govern- politician as an entrepreneur, out to col-
ment interventions (lobbying). The lect the greatest possible number of
19th century saw the term ‘lobbying’ votes which he/she wins by offering
being incorporated into general linguis- certain political outcomes, e.g. privi-
tic usage in the United States and sub- leges such as transfer payments (social
sequently being used in Europe as well. security contributions and government
Interest groups or lobbies are →subsidies, etc.) for certain groups of
defined as voluntary associations of per- voters. In return, he/she expects politi-
sons and corporations established with cal support (re-election). The more
the aim of bringing pressure to bear politicians can manipulate the (eco-
upon legitimate political representatives nomic and) political status quo through
(in particular, the legislature and execu- their discretionary freedom to act, the
tive). The associations, also referred to easier it is for them to offer their con-
as pressure groups, want to exert their stituents gifts, and the greater the dif-
influence on government decision- ference interest groups can make.
making processes, with particular Such lobbyists are typical of indirect
emphasis on their own specific inter- democracies. Since the individual voter
ests. Their involvement in the forma- can rarely make an impact on political
tion of the political will is not constitu- decisions on his/her own, collective
tionally regulated. representation is necessary. Lobbies
Interest groups take many different enable their members to combine and
forms and can be roughly divided into articulate their concerns. They offer
possibilities for participation, commu- But there are also disadvantages

nication and the allocation of values. since the lobbyists can weaken the role
The better they are organised and the of parliament in favour of the executive,
more members they have, the stronger and in communication with the minis-
are the interest groups. However, too terial bureaucracy, only their own spe-
many members can weaken the impact cial interests are promoted. This also
and lower the chances of securing spe- means that minorities may be exploited
cial privileges. Thus, lobbyists represent if they cannot muster the required
shared interests, while there are always number of votes during the political
those who are merely ‘catching a ride’. process to represent their interests
This means that workers who are not effectively. On the other hand, even
affiliated with a trade union also receive majority groups of the population,
pay rises without making any contribu- which can be organised either with dif-
tions. ficulty or not at all, can be exploited by
powerful minorities. The effect that
How do interests groups work? this has on economic policy is relevant
Among other things, interest groups because this is where financial redistri-
offer politicians financial assistance bution is initiated. The state can appor-
(donations), information, know-how, tion financial favours to certain sub-
political advice, record keeping, posts groups of the population, but not with-
on a supervisory board and well-paid out the remaining population having to
jobs after the completion of their polit- pay for them.
ical careers. They can ‘infiltrate’ politi- Financially strong and well-organ-
cal parties with their members, and ised interest groups have the ability to
through the media they can support manipulate the state. This is referred to
politicians or do them harm. Moreover, as the redistribution state, rent-seeking
they can threaten to withdraw their and haggling democracy. The high pro-
support from a →political party or a portion of social security expenditure,
politician at the next election, move the subsidy commitments and the asso-
enterprises to a different location, etc. ciated diminished growth reflect the
exaggerated influence of such interest
How should the existence of interest groups in their attempt to evade the
groups be evaluated? adjustments which →competition entails
In large societies, a direct democracy is by lobbying.
problematical. Through elections, rep- Even the ordo-liberal Walter
resentatives are selected, who have to →Eucken expressed concern about the
take political decisions in keeping with exaggerated influence of interest groups
the constitution. Interest groups have and included the principle of the delim-
made it possible to organise the will of itation of power of interest groups in
the electorate and to find out what they his guidelines on government econom-
want. The existence of interest groups is ic policy. Since lobbyists are perfectly
an efficient way of conveying the needs able to enforce their wishes against the
of the population to the parliamentary majority of the population and at their
representative. expense, the less powerful majority of a
278 International currency system
society, the common good of a society, must then be hoped that groups which
must be protected against the harmful are disadvantaged by the current legisla-
influence of interest groups. While the tion are equally keen lobbyists.
state saw its purpose as imposing and A mandatory analysis of the distri-
keeping order, the influence of the bution effects of all legislation projects
interest groups was negligible. The that do not meet the principle of uni-
transition to the ‘welfare state’ led to a versality would be helpful. This would
‘politicisation of the economy’ and to increase transparency and would alert
an ‘economisation of politics’. competing interest groups to the threat
‘The liberal, democratic state, which of financial disadvantages. The exagger-
had been established in order to abolish ated influence of interest groups in con-
the law of force through the force of the temporary society can lead to the state
law, finds itself increasingly forced to degenerating into a redistribution
abandon the force of the law to serve agency and increasingly losing its func-
the law of force’ (Kirsch, p.108). tion as an organising force.
How can society protect itself against REFERENCES:
the harmful influence of the lobbyists? BILGERI, A. (2001), Das Phänomen

On the one hand, lobbyists are expect- Lobbyismus, Norderstedt; BLÜMLE, E-B.
(1995), Lobby, in: Görres-Gesellschaft (ed),
ed to adhere to transparency in their
Staatslexikon, 7th edition, Freiburg i. Br., pp.
actions, as for example it is required in
929-932; KIRSCH, G. (1988), Der redistri-
the United States where interest groups butionspolitische Interventionismus: Von
have to be registered. The ‘public list of der Lenkung der Wirtschaft zur Zerstörung
registered federations and their repre- des Staates, in: Cassel, D. et al (ed),
sentatives’ (lobby list) of the German Ordnungspolitik, Munich, pp. 107-133; LEIF,
Bundestag, on the other hand, includes T./SPETH, R. (ed) (2003), Die Stille Macht:
only those federations that make an Lobbyism in Germany, Wiesbaden.
application in order to gain official
access to parliament, the government Werner Lachmann
and its sessions.
Since the large room for manoeuvre
in politics is the cause for successful International currency system
lobbyism, this very room for manoeu-
vre would have to be limited. This The international currency system
would be possible by giving laws which includes all agreements and institutions
accord certain sub-groups of the popu- that exist to ensure the smooth execu-
lation preferential treatment only a lim- tion of international monetary transac-
ited period of validity (sunset legisla- tions (→currency system and exchange rate
tion). regimes).
For example, if an interest group The organisation of this system has
wins a subsidy it should be granted for a significant impact on the internation-
a limited time only. After that, they al division of labour, the level of income
must try again to enforce their special and the employment levels of the coun-
interests during the political process. It tries concerned.
On the one hand, the subject of rates with foreign exchange market
international agreements is a structural interventions by the central banks if
framework for free currency exchange required), ‘crawling pegs’ (parities
(convertibility of currencies). This which are adjustable gradually, e.g.
refers primarily to the kind of exchange monthly) or ‘graduated flexibility’
rate system and currency reserves. (generally fixed exchange rates with
Basically, there are three different occasional changes of parity, e.g. the
exchange rate systems. Bretton Woods system, the European
In the system of ‘flexible exchange Monetary System).
rates’, the exchange rates (exchange Especially in the case of fixed rate
ratio of two currencies) form freely systems, the central banks have to hold
through →supply and demand in the for- currency reserves in their portfolio in
eign exchange market. Government order to be able to fulfil their interven-
interference (generally by the national tion obligation, if necessary, in the form
central banks) in order to modify this of currency purchases or sales in the
exchange ratio does not take place. foreign exchange market. Currency
In systems of ‘fixed exchange rates’, reserves include the gold reserves of the
the exchange ratios between the cur- central banks, their foreign exchange
rencies of several countries are fixed by reserves as well as their reserves of arti-
contractual ‘parities’. Deviations from ficially created currencies (e.g. special
the agreed exchange rate (or a certain drawing rights of the International
range that has been agreed and within Monetary Fund). This is conditional
which the rate of exchange can move upon international agreements, which
freely up and down) force the national guarantee the convertibility of the
central banks to intervene in the foreign reserve medium (commutability of the
exchange market, in order to keep the reserve medium into other currencies
exchange rate within the permissible under market conditions).
range. Other international agreements
‘Currency board systems’ represent concern the creation of a systematic
the hardest form of exchange rate framework for the free international
adjustment (‘hard peg’). The creation payment and capital flow. Certain
of a national currency exclusively countries could potentially be opposed
through the purchase of a reserve cur- to the systems-theoretical justification
rency with a fixed link to the exchange of the advantages of free capital transac-
rate of this anchor currency, provides tions (capital mobility) on the grounds
complete coverage of the circulating of their political and economic inter-
money supply through the anchor cur- ests.
rency reserve of the currency board. Balance of payment problems or
Variations of this system are referred to exchange rate targets are frequently the
as steered exchange rate systems, which causes for capital movement controls on
are located in the spectrum somewhere the part of the countries concerned.
between flexible and firm exchange rate Capital transaction controls can take the
systems. Among these are ‘controlled form of quantitative restrictions or taxes
floating’ (basically flexible exchange on international financial transactions.
280 International Labour Organization
These include the duty to obtain per- in less-developed member states

mits to raise loans abroad, the restriction through financial assistance and advice
of cross-border portfolio investments, (→international organisations).
or interest equalisation tax payments on Problems for international currency
yields from foreign investments. regulations result from the increasing
Based on the unfavourable effects of →globalisation of the financial and goods
capital movement controls on econom- markets as well as from →enterprises.
ic →integration, →growth and prosperity, Volumes and the (increasingly specula-
international agreements (e.g. IMF tive) volatility of capital flows and the
statutes, EEC Treaty) are aimed at the monetary crises which result (e.g. the
dismantling of capital movement con- Asian crisis in 1997) require the reform
trols. The supervision and implementa- of the existing global currency regula-
tion of monetary agreements are tions. Suggestions in this regard are
incumbent upon national and suprana- especially focused on greater trans-
tional organisations. The responsibility parency (early warning signs of finan-
for monetary policy matters at national cial crises, safety standards in the con-
level is mostly reserved for the respec- text of government supervision of the
tive central banks. They are obliged to banks) and on the areas of competence
ensure currency stability (→price level of supranational monetary institutions
stability) as well as the proper execution (e.g. the IMF).
of capital transactions. In addition, an
intervention obligation exists for fixed REFERENCES:
exchange rate systems. GERMAN FEDERAL BANK (1997),

As a supranational organisation, the Internationale Organisationen und Gremien im
Bereich von Währung und Wirtschaft,
Bank for International Settlements has
Sonderdrucke der Deutschen Bundesbank
the task of promoting cooperation
No. 3, Frankfurt/M.; FRENKEL, M./
among the central banks, identifying MENKHOFF, L (2000), Stabile Welt-
new opportunities for international finanzen? – Die Debatte um eine neue interna-
financial transactions and playing the tionale Finanzarchitektur, Berlin; WILLMS,
role of trustee or agent in respect of the M. (1995), Internationale Währungspolitik, 2nd
capital transactions with which it is edition, Munich.
entrusted.
The contribution to the promotion Carsten Eppendorfer
of world trade and prosperity by the
member states of the IMF consists in
the commitment of these states to close International Labour
cooperation in international monetary Organization
policy matters and capital movement, as
well as to mutual financial assistance in The International Labour Organization
the event of balance of payments prob- (ILO) was created in 1919 as a three-
lems. tiered organisation. Representatives of
The institutions of the World Bank employees and employers cooperate
Group are pursuing the common goal equally with governments. They are
of supporting economic development working towards the development of
joint interventions for the promotion of of the activities of the ILO. The ILC had
social justice and improved living con- up to 2004 adopted a total of 378 inter-
ditions all over the world. national work certificates (184 agree-
This goal is based on the statement ments and 194 recommendations).
in the preamble of the ILO constitution Furthermore, the ratifications of
that world peace, if it is to last, can only approximately 6,000 agreements have
be built on →social justice. This still con- been registered with it. The agreements
tinues to be true today and serves as the deal with a wide range of social prob-
basic orientation for all ILO activities. lems, including key fundamental rights
The Declaration of Philadelphia (ad- (such as freedom of association, the
opted in 1944 as an appendix to the eradication of hard labour and the
constitution of the ILO) clarifies this removal of discrimination in the work-
basic orientation further. It declares the place), minimum wages, labour admin-
right of all people to strive for material istration, worker relations, →employment
prosperity, spiritual expression, free- policy, working conditions, social securi-
dom, dignity and financial security ty and →occupational health and safety.
under equally favourable conditions. The agreements and recommenda-
Furthermore, the declaration reads: tions form the International Labour
‘Poverty, wherever it exists, endangers Code. The significance of the standards
the prosperity of all.’ which it contains goes far beyond the
In 1946, the ILO became the first regulated issues alone. These standards
special organisation of the United represent the practical application of
Nations. In 1969, it received the Nobel many principles which form part of the
Peace Prize. The ILO had 177 member General Declaration of Human Rights
states in 2004. Its main body, the and the International Human Rights
International Labour Agency (ILA), has Pacts of the United Nations. Further-
its headquarters in Geneva. more, they represent a wealth of experi-
Its highest executive organ is the ence which is at the disposal of coun-
International Labour Conference tries at all levels of development.
(ILC), which meets for several weeks The International Labour Code has
every year. The board of directors, a considerable impact on the develop-
together with the ILA, essentially works ment of welfare legislation worldwide.
in preparation for this conference. Through the ratification of an agree-
The ILO also works through fur- ment, member states enter into a two-
ther committees, such as regional meet- fold obligation: on the one hand, the
ings, industrial advisory bodies and regulations contained in the agreement
groups of experts. The ILA is headed by become binding; on the other hand, the
a general manager who has been select- states are subjected to a certain degree of
ed by the board of directors. international ‘control’. However, this
From the outset, the main task of the has not so much the character of judicial
ILO was to improve employment and decisions than that of a constant dia-
living conditions through agreements logue through which political pressure
and recommendations. This task of set- is exerted if compliance with the regula-
ting standards continues to be the focus tions is unsatisfactory.
282 International Labour Organization
Since 1964, thanks to the reports • Employment conditions and the working
submitted by the controlling bodies of environment: →Occupational health and
the ILO, it has been possible to har- safety, employment and living condi-
monise national laws and practices with tions.
the regulations of ratified agreements in
approximately 2,000 cases. Further- • Employment relations (including employ-
more, the organisation has stepped up ment administration): Social security,
its activities for the support of member worker education and support for
states in this area, particularly through employers’ associations.
the increasingly frequent establishment
of direct contacts with governments, • Child labour: The ILO has made it a
through their regional advisers for priority to assist many countries with
international employment standards, by the eradication of child labour. The
organising seminars and training cours- research activities of the ILA are
es, and through the dissemination of intended to lead to new insights into
information on the standards and prin- labour problems and to suggest possi-
ciples of the ILO. Today, the pro- ble solutions. Such research activities
grammes of technical cooperation con- are often incorporated into the com-
centrate on the following key areas: pilation of reports for the Interna-
tional Labour Conference and other
• Employment and development: Defi- meetings.
nition of national policy and strate-
gies; staff planning; special labour- • Setting standards, technical cooperation,
intensive programmes for public and research: These three tasks of the
work; poverty reduction in rural ILO support each other while being
areas; technological equipment and interdependent. In active partnership
development of small businesses. with governments, employers and
employees, the aim is to create social
• Training: Support with the detailed justice for the whole world.
development of training policies and
systems; training of top management REFERENCES:
staff and business development; voca- BUNDESMINISTERIUM FÜR ARBEIT

tional training in industry, rural areas UND SOZIALORDNUNG (1994),
Weltfriede durch Soziale Gerechtigkeit,
and commerce as well as the develop-
Bundesvereinigung der Deutschen Arbeit-
ment of training methodologies and
geberverbände und Deutscher Gewerkschaftsbund,
material. Specific attention is paid to Baden-Baden; HONECKER, M. (ed)
vocational training for the handi- (2001), Evangelisches Soziallexikon Stichwort:
capped and training for women and Internationale Arbeitsorganisation, Stuttgart;
youth who have never been to school. INTERNATIONAL LABOUR OFFICE
(2000), World Labour Report 2000, Geneva.
• Activities classified in terms of industries:
Particularly in favour of the develop- Peter Clever
ment of cooperatives and pro-
grammes for the shipping industry.
International migrations programmes in Europe and the Bracero

programme between Mexico and the
Facts US, which had originally been con-
The history of mankind is also a history ceived on a strictly temporary basis.
of migrations. Since there has been However, it soon became obvious that
homo sapiens, there has also been homo there was nothing more permanent
migrans. The story of the expulsion than the supposedly temporary migra-
from paradise at the beginning of the tion. Sooner or later the immigrant
Bible is well known, and the New workers brought their families with
Testament starts with the story of an them; these formed social contacts and
escape. groups that wanted to be heard in the
World history is full of many other political arena.
examples documenting the history of Apart from the economic conse-
migration, whether it relates to con- quences, immigration also caused a
quest, destruction, suppression, expul- number of urgent social and political
sion or exclusion. After birth and death, problems (regarding distribution). The
migrations are the third determining latter became increasingly obvious as
factor for the way a population develops more asylum-seekers and refugees
(→demographic development). (from political violence) began to influ-
ence the European migration statistics.
The forgotten historical dimension...
The history of mankind has always …and the overrated dimension of the present
known strong migratory movements. day
One need only be reminded of the pop- Across the globe, an estimated 150 mil-
ulation migrations of antiquity and the lion people are not living in their coun-
Middle Ages, or of the waves of inter- tries of origin. This roughly equals the
continental emigration from Europe to population of Russia, which is in sixth
the New World and the distant place on the list of the world’s most
colonies. The migratory flows of the populous countries. However, relative
19th century consisted mainly of an to the world’s population of six billion,
ongoing emigration from relatively rich the proportion of foreigners shrinks to
European countries to relatively poor as little as 2-3%! In other words, 97% of
traditional host countries such as the people live in the country whose
United States (US), Canada, Australia, nationality they possess. It is true that
New Zealand and Latin America. At many ‘inhabitants’ were born as ‘for-
that time, the main focus of interest was eigners’ who have changed nationality
on the consequences of emigration. in the course of their lives and thus
After the Second World War, the dropped out of the immigrant statistics,
migratory flow started to change direc- so that the migration figures are proba-
tion. Initially, the migration of labourers bly higher than the estimated 150 mil-
from poorer countries in the South to lion.
the richer industrial nations of the Even within culturally and linguisti-
North became prominent and mani- cally very similar ‘natural’ living spaces,
fested itself in the immigrant worker the transnational, international migra-
284 International migrations
tion remains low – even within the Microeconomic factors

European Union (→EU). From an economic perspective, the
Although within the EU freedom of decision to migrate is the result of an
movement applies to all workers and individual search and optimisation
their families, there have hardly been process. It is assumed that people weigh
any strong migration movements. Only up rationally the pros and cons of mov-
in Belgium does the proportion of EU ing or staying, and that through their
foreigners reach 5% of the resident actions they aim at maximising their
population. In France, Germany, personal benefit (quality of life). It fol-
Sweden and Ireland, only about 2% of lows that people are prepared to move if
the resident population are EU foreign- migration, by comparison with staying,
ers, while in all other EU countries the suggests a greater personal benefit.
proportion of EU foreigners of the res- From the perspective of the individ-
ident population is about 1%. ual, the decision to migrate is the prop-
All in all, even in the age of →global- erly considered result of an evaluation
isation, homo migrans still remains part of process. The personal situation (age,
an infinitesimal minority. From a euro- sex, health, family status, number of
centric point of view, it must not be for- children, investments in one’s own
gotten that the South–South migrations human capital) determines the migra-
in Africa or Asia are still quantitatively tion behaviour of the individual. It is
more significant than the South–North not difficult to understand why
or East–West migrations. They became younger, single men in good health
more dramatic because during the 20th generally exhibit greater mobility than
century, national borders which had older, married men with children. But
been artificially determined by instead of regarding migration as the
(European) colonisers and their well-considered consequence of an
descendants resulted in strong migrato- individual decision, the emigration of
ry movements, often within the same an individual can be interpreted as
cultural group, in Africa, Asia and Latin strategic behaviour by a family or a
America. World wars and political deci- micro population group.
sions taken at the drawing board did the By way of a distribution of risks, the
rest, so that during the 20th century family or group decides to send some of
people not only had to flee, but also that their members ‘on migration’ (compa-
in Europe, just like in Africa and Asia, rable to the risk distribution strategy
probably far more borders were shifted within the portfolios of a capital
across people than people moved across investor). Successful immigrants
borders. encourage other family or group mem-
bers to follow, and they facilitate access
Causes to the target country for these (the
Migratory phenomena can have a com- snowball effect, which can lead to net-
bination of different causes. Generally, work migration). Less successful mig-
economic factors are a necessary, but rants either move back or try their luck
definitely not a sufficient, motive for in other target countries. For the family
migration. or the group, this collective behaviour
leads to a risk reduction (one will make price (= wage) differences in the job
it), and in the longer term also a reduc- markets.
tion of costs (‘bad’ target countries can Thus from the economic perspec-
be replaced by ‘promising ones’). tive, the yardstick is the ‘law of the uni-
form price’ as a benchmark for efficien-
Macroeconomic factors cy. This rule means that (tradable)
From a macroeconomic perspective, goods must cost more or less the same
the different living conditions of differ- all over the world and that the net pur-
ent regions in the world are an impor- chasing power of hourly wages for
tant factor for triggering migration identical work ought to be similar
processes, which can take place for eco- worldwide. Therefore, macroeconomi-
nomic reasons (different per capita cally, immigration is positive for the
income) or political reasons (war, insta- host country because it contributes to
bility, a lack of legal security, insufficient stability or even to a lowering of wage
protection for minorities or a lack of levels, while at the same time →employ-
basic human rights, among many oth- ment and demand are increased. Like
ers). free trade on goods markets, the free
But emigration can also be a reac- migration of the factors of production is
tion to the lack of local initiatives aimed an indispensable condition for the
at structural transformation from an →growth of the national product.
agrarian to an industrial society. Finally, Migration can, however, also be
ecological collapse also tends to create judged more critically. If not only the
environmental refugees. extra hands but also the clever heads
move, the consequences can be com-
Consequences pletely different. This phenomenon is
The effects of migration are complex called ‘brain drain’ and could, for exam-
and manifold. Above all, the time factor ple, be observed in the case of the
and the reciprocal effects are important. South–North migration in Italy. In that
Short-term effects regarding different case, migration is not just a compensa-
standards are superseded in the long tory regulation or a short-term arbitrage
term by growth effects. Immigration phenomenon, but a self-perpetuating
modifies the available labour supply cause for the accelerating pace of the
and thus the relative scarcity of the fac- divergent economic development of
tors of production. factor-exporting poor and factor-
importing rich countries. It increases
Macroeconomic consequences of immigration the prosperity gap between underdevel-
Labour migrations are positive in many oped (peripheral) and industrialised tar-
respects. They have a balancing effect. get regions.
Immigration satisfies demand in the job
market and allows the recruitment of The distribution problem
heads or hands which are needed at The problem of migration lies in the
home from outside the country. fact that although immigration is on the
Migration is therefore a kind of arbi- whole positive for the national econo-
trage phenomenon. It helps to balance my, not all local people benefit from it.
286 International migrations
Immigration triggers a structural trans- open to them in the job market, both in
formation which in the long run is terms of market conditions and from
urgently needed and which boosts aver- the point of view of immigration law.
age productivity. In the short term, The duration of their stay and the
however, it can cause displacement process of integration or assimilation
effects for individual people. This is are equally important.
particularly detrimental for those locals To be able to judge the effects of
who occupy jobs in the production immigration one has to take into
process, from which they are displaced account agglomeration or concentra-
by the immigrants. tion, as well as displacement effects. In
If, for example, as in the case of the this case, one is less concerned with the
information technology (IT) ‘green objective macroeconomic burden than
card’, data-processors required in the with subjective individual hardships.
German job market are recruited In Europe, labour will be in increas-
abroad, the wages of local professionals ingly short supply in the future. The
in more or less the same positions will falling birth rate during the past 10
tend to fall. Complementary German years will cause a recruitment problem
factors of production (e.g. employing in years to come – particularly also
companies), however, benefit. Owing within those areas of the →welfare state
to the immigrant IT specialists, their where future generations have to solve
own productivity rises. inherited burdens.
Lastly, immigrants compete with As Western Europe is ageing demo-
local people for the following: graphically – because there are more
and more older people and fewer and
• Social security benefits, either funded fewer young people – it will become
directly through contributions or increasingly urgent to be able to access
indirectly through tax payments. foreign labour markets (→demographic
development). It also has to be remem-
• The use of public goods (the legal bered that in a highly globalised world
system, the judiciary, internal and with a highly differentiated division of
external security), infrastructural labour, isolated national job markets
installations (transport, telecommu- increasingly have to be seen as an
nications and energy networks) and anachronism (→globalisation): it is ex-
services (the health and education pensive, requires expensive control
systems), which are available to all mechanisms and provokes illegal (eva-
and which are financed directly sion) deals. The European migration
through levies and fees or indirectly problem of the 21st century thus is not
through taxes. caused by too much mobility but by too
little.
How much immigrants contribute
to the funding of the social and welfare REFERENCES:
benefits which they claim and the pub- BATH, K. (2000), Europa in Bewegung,
lic goods which they utilise is closely Munich; OECD (2001), Trends in
International Migration (Sopemi 2000), Paris;
linked to the opportunities that are
STRAUBHAAR, T. (2001), Migration im 21. global economy. The world economic

Jahrhundert – Von der Bedrohung zur Rettung crisis that started to make itself felt in
sozialer Marktwirtschaften?, Tübingen. 1929 led to the final break-down of the
unstable international currency and
Thomas Straubhaar
commercial systems.
This sequence of events was typical
of the governments of that era and their
International organisations refusal to make allowances for the
international economic and political
The debate about the organisation of consequences of strictly self-interested,
political cooperation and monetary sys- non-cooperative and aggressive eco-
tems, as well as the international nomic policies. The effects on the
exchange of goods and services, goes economy were catastrophic, and
back to long before the Second World included the collapse of the currency
War. Up until the beginning of the First and the stock exchange, shrinking pro-
World War, the world economy was ductivity, a 50% reduction of world
largely self-regulating without contracts trade, falling prices and wages, and ris-
based on international law and interna- ing unemployment. The economic cri-
tional institutions, through free trade sis had grave political consequences
and a stable monetary system (the so- such as the rise of national socialism in
called gold standard). Germany.
As the dominant political and eco- This political and economic crisis
nomic power of this time, the United has always served as a warning and as a
Kingdom (UK) represented the rele- reference point for the post-Second
vant organising factor (Pax Britannica). World War economic system. Thus
This state of affairs was frequently used even before the end of the Second
as a point of reference in subsequent World War a vision of a new interna-
efforts to repair the international struc- tional community emerged, which no
tures which had been destroyed by the longer only relied on political coopera-
First World War. tion. The integration of all major
After the First World War, it was nations with regard to currency, trade
hoped that the League of Nations as a and development corresponded to the
system of states would restore political goal of globally reducing the likelihood
stability that had failed due to the lack of future conflicts turning into war and
of a strong political and economic was therefore supposed to form the
organising power such as the UK had basis for a new system, the so-called
been before the First World War. Also peace order.
the United States (US) was not yet The establishment of new interna-
ready for this task. tional organisations was discussed. The
Within the international trade zone, conference of Bretton Woods (US) in
too, a reliable system with which to 1944 sealed a new monetary union of 44
curb protectionism could not be states in a fixed rate system (→currency
achieved. The First World War had irre- system and exchange rate regimes) with the
versibly damaged the structure of the dollar as the key currency and thus indi-
288 International organisations
Brief summary of some international organisations
International Monetary Fund (IMF)

• Established 1944 in Bretton Woods (US); Headquarters: Washington, D.C. (US); Members:
182.
• Aim: Promotion of international cooperation in the field of monetary policy, especially the sta-
bilisation of the exchange rate.
• Instruments: Monitoring and assessment of members' exchange rate policy; financial aid
(credits and loans) to create balance of payments equilibrium, mostly associated with eco-
nomic policy conditions; skills transfer in the areas of monetary and fiscal policy.
• Internet: www.imf.org
World Bank (formerly: International Bank for Reconstruction and Development)

• Established 1944 in Bretton Woods (US); Headquarters: Washington, D.C. (US); Members:
184.
• Aim: Development aid for poverty reduction and for the creation of sustainable growth in the
world’s poor and poorest countries; support particularly in the areas of education and health.
• Instruments: Financial support (loans and credits); analysis and consultancy; skills transfer.
• Internet: www.worldbank.org
United Nations Organisation (UNO)

• Active since 1945; headquarters: New York; Members: 191.
• Aim: Protection of peace and security, preservation of human rights, peaceful cooperation
between the nations, arbitration in international military, economic, social, humanitarian and
cultural conflicts.
• Instruments: The ‘family’ of the United Nations includes 15 sub-organisations as well as
diverse programmes and committees with their own agendas and budgets.
• Internet: www.un.org
General Agreement on Tariffs and Trade (GATT) and/or World Trade Organization (WTO)
• Multilateral treaty, agreed 1948 in Geneva (Switzerland); Headquarters: Geneva; Members:
142 (WTO).
• Aim: Removal of obstacles to trade and tariffs, signed as the basis of a trade organisation
which was subsequently not established; gradually took on the character of an international
organisation.
• Instruments: Official negotiations with all partners to the agreement; application of the prin-
ciple of the most-favoured nation clause (if one member country is granted preferential tar-
iffs, it immediately and unconditionally applies to all the other members) and reciprocity
(equal concessions for rebates) among the partners to the agreement as well as the prohi-
bition to tighten existing and to introduce new obstacles to trade; opportunities to settle con-
flicts, supervision and analysis of the member countries’ trade policies, special status for
developing countries (so-called Enabling Clause).
• Result: The negotiations led to a reduction of customs duties worldwide and to the prohibi-
tion of any kind of quantity-based obstacles to trade; the last round of negotiations (Uruguay
1986-1994) resulted in the establishment of the World Trade Organization (WTO), the suc-
cessor organisation, on 1 January 1995.
• →World trade order
• Internet: www.wto.org
rectly the US as the controlling power. approximately 3,000 to 4,000 such

The International Monetary Fund organisations. They are specifically
(IMF) was established for the monitor- expected to coordinate cooperation in
ing and stabilisation of the system, and different areas, usually aided by a
the World Bank was established for the framework of laws and regulations on a
promotion of global economic develop- contract basis, as well as the
ment. The establishment of the United creation of a communication platform
Nations Organisation (UNO) in 1945 to facilitate ongoing dialogue between
formed the basis for worldwide political the members.
cooperation; later, its individual sub- But more distinctions can be made
sidiary organisations came into being. using various characteristics. The work-
The expansion of international trade ing group represents a significant dis-
was built on the General Agreement on tinguishing feature for international
Tariffs and Trade (GATT), which was organisations. Thus governmental
replaced by the World Trade Organi- agencies (e.g. the World Trade Organi-
zation in 1995. zation) should be distinguished from
In the meantime, other internation- non-governmental agencies (e.g.
al organisations have been created and Amnesty International). The propor-
today represent important participants tion of governmental organisations to
on the political landscape. An interna- non-governmental organisations is
tional organisation is generally defined approximately 1 in 10. The governmen-
as an association of several members tal international organisations are of
across national borders; multinational special interest.
corporations are excluded here. It is Whether or not a country is a mem-
estimated that in 1995 there were ber of an international organisation can
GATT negotiations on the reduction of customs tariffs
Place/ Start Duration No. of Weighted Trade affected

Name countries reduction by reduced
participated of customs customs tariffs in:
tariffs US$ % of
(%) billion trade
worldwide
Geneva 1.4.1947 7 months 23 19 10 ~20.0

Annecy 1.4.1949 5 months 13 2
Torquay 1.9.1950 8 months 38 3
Geneva II January 1956 5 months 26 2 2,5 2.7
Dillon 1.9.1960 11 months 26 7 4,9 3.5
Kennedy May 1964 37 months 62 35 400 18.6
Tokyo 1.9.1973 74 months 102 34 148 9.0
Uruguay 1.9.1986 87 months 123 38 464 25.0
Created WTO to replace the GATT
Doha 1.11.2001 to be continued 141
290 Interventionism
have an immense impact on its sover- in the individual states (e.g. the World
eignty and thus on the national eco- Economic Summit). In this way, inter-
nomic policy. The range of an interna- national organisations make a substan-
tional organisation over time in terms tial contribution to →globalisation.
of its issues, geographically and legally, In principle, the international
as well as its degree of competence is organisations in the economic sector
also important for the members. In caused the world economy to stabilise
terms of economic policy, international and created, simultaneously with the
organisations play the most important political rapprochement, the basic con-
role in the sphere of the economy, most ditions for a more even development of
of all in regulating capital flows, pay- mankind in the future. The process of
ment transactions and also trade. international rapprochement was, and
Geographically, the most diverse still is, always accompanied by setbacks,
constellations are possible – from but the new system has showed itself to
regional associations (e.g. the →EU) to be relatively resilient and stable.
continental or multi-regional ones (e.g. Without doubt, today’s international
the North American Free Trade order can be described as the historical-
Association – NAFTA), all the way to ly unique result of efforts to achieve a
global organisations that cover whole free and democratic world.
continents (e.g. →International Labour
Organization). REFERENCES:
The legal range has many facets. ANDERSEN, U. /WOYKE, W. (ed) (1995),
The contractual commitment to com- Handwörterbuch Internationale Organisationen,
2nd edition, Opladen; DEUTSCHE BUN-
mittee resolutions of the organisation,
DESBANK (1992), Internationale
the voting and delegation rights in the
Organisationen und Gremien im Bereich von
committees, the membership condi- Währung und Wirtschaft, 4th edition,
tions in the organisation, the following Frankfurt/M.; PLOETZ, C (ed) (2001), Der
of guidelines and innumerable other große Ploetz. Daten Enzyklopädie der
aspects are agreed and implemented in Weltgeschichte, 32nd revised edition, Freiburg
each international organisation in a dif- i. Br.
ferent way. The specific legal arrange-
ments, however, determine the degree Marina Ignatjuk
of competence of the organisation and
thus the influence on the national poli-
cy (and therefore the economic policy) Interventionism
of the member states. They also deter-
mine whether the organisation can Planned economies of socialist admin-
reach its objective and whether it can istrations (→socialism/planned economy)
continue its process of integration. are characterised by systematic and
Over time, the formal (contractual- comprehensive state interventionism
ly fixed) organisations were comple- for the fulfilment of the government’s
mented by informal ones, and it is the economic targets. In contrast to this,
latter which can also have a significant interventionism (→interest groups,
influence on world politics and events lobbies) in →market economies serves to
Interventionism 291
modify informally specific aspects of tural transformation, increasingly inter-

the structure, execution and results of ventionist trends have to be expected.
market processes (specifically targeted). Strong tendencies are emerging in the
In particular, associations, →political transition societies of Central and
parties and national bureaucracies pro- Eastern Europe to cling to the familiar
mote interventionism in the political systematic interventionism and the
process of a democracy. →Enterprises, associated security of economic and
industries, regions and voter groups ask social positions.
for financial privileges and index-linked Although the interventions are
pensions, which cannot be granted in specifically targeted, they affect other
the desired way within the limitations areas. This often makes it necessary to
of a competitive economic system. The follow one intervention with others in
parties hope it will bring them votes, order to correct the unwanted effects of
while associations hope it will bring the first one. In such intervention
them members. chains, each intervention involves fur-
Through political and economic ther interventions. Thus intervention-
interventions, the national bureaucra- ism spreads like an oil stain.
cies benefit by expanding their respon- Any parameter of action which is
sibilities and powers, and by adminis- relevant to a competitive system can be
tering the requisite budgets which they used as a point of departure for inter-
can use to secure their own incomes ventions: market entry and market exit
and financial gain. It is often easier to conditions (→open markets); price
win approval for specifically targeted charges and clearing; quantity regula-
interventions in the political process tions (quotas) in the area of the factor
due to the fact that the benefits are and product markets; production and
equally specific, while the costs can be quality regulations; company invest-
spread out thinly, are hardly noticeable, ment and marketing policy. The inter-
and thus not really attributable. ventions can be limited to sectors or
A large variety of only inaccurately regions, but they can also refer to enter-
defined goals are pursued with inter- prise and product-specific restrictions
ventions. The vague delineation gives of free market exchange.
the activists more scope to take deci- Apart from distortions and falsifica-
sions. This, in the end, is used to obtain tions of the national and international
economic or social outcomes that are division of labour and competition, the
supposed to be unattainable through consequences of interventionism
the process of free market →competition: include a lack of respect for a super-
for example, the preservation and ordinate idea of political and economic
creation of jobs in certain enterprises, action, roughly similar to the ‘econom-
industries and regions, and the organi- ic constitution of competition’.
sation of economic structures regarding Through their cooperation with
certain developmental, industrial, social interest groups and political party
or integrational policy goals. groupings, the state intervention
Particularly during periods of eco- departments assume the character of
nomic downturn and at times of struc- independent economic and socio-polit-
292 Interventionism
Transparency International Corruption Perceptions Index 2007
Rank Country/ CPI Rank Country/ CPI Rank Country/ CPI

Territory Score Territory score Territory score
1 New Zealand 9.4 61 Cuba 4.2 Ukraine 2.7

Denmark 9.4 Poland 4.2 Benin 2.7
Finland 9.4 Tunisia 4.2 123 Guyana 2.6
4 Singapore 9.3 64 Bulgaria 4.1 Zambia 2.6
Sweden 9.3 Croatia 4.1 Comoros 2.6
6 Iceland 9.2 Turkey 4.1 Nicaragua 2.6
7 Netherlands 9.0 67 El Salvador 4.0 Viet Nam 2.6
Switzerland 9.0 68 Colombia 3.8 Mauritania 2.6
9 Norway 8.7 69 Ghana 3.7 Niger 2.6
Canada 8.7 Romania 3.7 Timor-Leste 2.6
11 Australia 8.6 71 Senegal 3.6 131 Nepal 2.5
12 Luxembourg 8.4 72 Morocco 3.5 Yemen 2.5
United Kingdom 8.4 China 3.5 Philippines 2.5
14 Hong Kong 8.3 Suriname 3.5 Burundi 2.5
15 Austria 8.1 India 3.5 Libya 2.5
16 Germany 7.8 Mexico 3.5 Iran 2.5
17 Japan 7.5 Peru 3.5 Honduras 2.5
Ireland 7.5 Brazil 3.5 138 Pakistan 2.4
19 France 7.3 79 Serbia 3.4 Ethiopia 2.4
20 United States 7.2 Georgia 3.4 Paraguay 2.4
21 Belgium 7.1 Grenada 3.4 Cameroon 2.4
22 Chile 7.0 Trinidad and Tobago 3.4 Syria 2.4
23 Barbados 6.9 Saudi Arabia 3.4 143 Gambia 2.3
24 Saint Lucia 6.8 84 Bosnia and Herzegovina 3.3 Indonesia 2.3
25 Uruguay 6.7 Montenegro 3.3 Togo 2.3
Spain 6.7 Maldives 3.3 Russia 2.3
27 Slovenia 6.6 Jamaica 3.3 147 Angola 2.2
28 Estonia 6.5 Kiribati 3.3 Nigeria 2.2
Portugal 6.5 Gabon 3.3 Guinea-Bissau 2.2
30 Israel 6.1 Swaziland 3.3 150 Sierra Leone 2.1
Saint Vincent and
the Grenadines 6.1 Thailand 3.3 Kazakhstan 2.1
32 Qatar 6.0 Lesotho 3.3 Belarus 2.1
33 Malta 5.8 FYR Macedonia 3.3 Zimbabwe 2.1
34 Macao 5.7 94 Madagascar 3.2 Côte d'Ivoire 2.1
Taiwan 5.7 Sri Lanka 3.2 Tajikistan 2.1
United Arab Emirates 5.7 Panama 3.2 Liberia 2.1
37 Dominica 5.6 Tanzania 3.2 Congo. Republic 2.1
38 Botswana 5.4 98 Vanuatu 3.1 Ecuador 2.1
39 Hungary 5.3 99 Dominican Republic 3.0 Azerbaijan 2.1
Cyprus 5.3 Armenia 3.0 Kenya 2.1
41 Czech Republic 5.2 Lebanon 3.0 Kyrgyzstan 2.1
Italy 5.2 Mongolia 3.0 162 Bangladesh 2.0
43 Malaysia 5.1 Algeria 3.0 Papua New Guinea 2.0
South Korea 5.1 Belize 3.0 Turkmenistan 2.0
South Africa 5.1 105 Argentina 2.9 Central African Republic 2.0
46 Costa Rica 5.0 Djibouti 2.9 Cambodia 2.0
Bhutan 5.0 Albania 2.9 Venezuela 2.0
Bahrain 5.0 Burkina Faso 2.9 168 Laos 1.9
49 Slovakia 4.9 Bolivia 2.9 Equatorial Guinea 1.9
Cape Verde 4.9 Egypt 2.9 Guinea 1.9
51 Latvia 4.8 111 Moldova 2.8 DRC 1.9
Lithuania 4.8 Eritrea 2.8 172 Afghanistan 1.8
53 Oman 4.7 Guatemala 2.8 Sudan 1.8
Jordan 4.7 Rwanda 2.8 Chad 1.8
Mauritius 4.7 Solomon Islans 2.8 175 Uzbekistan 1.7
56 Greece 4.6 Mozambique 2.8 Tonga 1.7
57 Namibia 4.5 Uganda 2.8 177 Haiti 1.6
Seychelles 4.5 118 Mali 2.7 178 Iraq 1.5
Samoa 4.5 Malawi 2.7 179 Somalia 1.4
60 Kuwait 4.3 Sao Tome and Principe 2.7 Myanmar 1.4
A country or territory's CPI Score indicates the degree of public sector corruption as perceived by business
people and country analysts. and ranges between 10 (highly clean) and 0 (highly corrupt)
Source: Transparency International Secretariat

Keynesianism 293
ical authorities. The state loses the abil- light of the world economic crisis. The
ity to act appropriately and becomes long, ongoing period of involuntary
subjected to persistent blackmail →unemployment generated doubt re-
attempts on the part of the groupings garding the classical theory, whereby
which have already been accorded spe- the self-regulating and self-healing
cial privileges. Interventionism is powers of the market are relied on and
susceptible to corruption, a mentality of controlled by prices (→liberalism).
entitlement and criminality. Keynes developed a demand-based
In order to avoid this, specifically model able to explain the under-used
targeted interference with the econom- factor labour and offering economic
ic process should be limited to cases policy measures designed to reverse
that are – as with certain kinds of envi- unemployment.
ronmental damage (→environmental pol- Insufficient macroeconomic de-
icy, →environmental protection objectives) or mand means that the →enterprise cannot
disasters – associated with negative sell the desired quantities in the goods
external effects, which can either not be markets. Due to assumed price rigidi-
eliminated at all, or not be eliminated ties (lacking downward mobility of
sufficiently or fast enough through prices and wages), the suppliers’ reac-
inclusion (internalisation) into the free tion to these marketing difficulties
market system. would be a reduction of the product
quantity, which in turn entails a
REFERENCES: decreased demand for workers. The
RÖPKE, W. (1929), Staatsinterven- shrinking demand for services means a
tionismus, in: Handwörterbuch der Staats- reduction of the scarcity of the factor of
wissenschaften, 4., completely revised edition,
production labour, and therefore leads
Jena, Supplement, pp. 861-882;
to shrinking wages or available →income
SCHÜLLER, A. (1998), Der wirtschafts-
politische Punktualismus: Triebkräfte,
in private households. Macroeco-
Ziele, Eingriffsformen und Wirkungen, nomically, the national income goes
Ordo - Jahrbuch für die Ordnung von Wirtschaft down.
und Gesellschaft, 49, pp. 105-126. In the Keynesian system of explain-
ing economic relationships, consump-
Alfred Schüller tion depends on the available income
Thomas Welsch alone, which causes a spiral of cumula-
tive downward movements (Keynesian
income dependence of consumption)
Keynesianism to develop. A reduced national income
leads to a weaker purchasing power of
Keynesianism is based on the theories the private households, making private
of John Maynard Keynes (1883–1946) consumption shrink. Since consump-
and develops these in the context of tion is a component of total demand, it
post-Keynesianism or new Keynesian equally goes down. The economic
macroeconomics. Keynes’s major work agents now require fewer goods than
The General Theory of Employment, Interest the enterprises would like to sell. For a
and Money (1936) must be seen in the shrinking production, the suppliers
294 Keynesianism
need smaller quantities of the factor of cy, i.e. stabilisation of the economic
production work and therefore contin- situation through government inter-
ue to reduce their demand in the labour ventions (→business cycle policy).
market. The price of work, i.e. the rate In phases of economic downturn
of pay, continues to go down in this (recession), government has to boost
way. The consequence of this is a fur- income and purchasing power of con-
ther reduction of available income, sumers through tax reductions, while
which starts off the second round of the generating consumer demand through
downward spiral. This process ends an expansive fiscal policy and loans
only when a general, temporary equi- (additional public investments, deficit
librium is reached with reduced spending), which revives overall eco-
demand and unemployment. nomic activity and from which workers
A second, significant component of and businesses benefit in equal measure.
the Keynesian theory is based on the During a boom, on the other hand, gov-
assumption that private economic ernment has the task of slowing down
activities and thus the →market economy demand through a restrictive fiscal poli-
has an inherent tendency to be unstable cy (revenue from tax increases which is
or imbalanced. An uncertain future not spent, cutting back expenditure, cre-
affects the demand for capital goods and ation of a budget surplus) and to put the
the attitude to capital investments, brakes on a run-away economy.
which fluctuate as a result. Waves of In this theory, Keynesianism uses
optimism and pessimism disturb an the plausible concept that in a market
even, balanced process. economy where workers and business-
During periods of depression, the es are not working to capacity, a
monetary policy of the central banks demand increase also increases the pro-
can lose its motivating effect on the ductive output and →employment. The
economic activity in real terms. The experiences of the war and post-war
economic agents then start to hoard all period confirm the view that in a mar-
the additional liquidity which has been ket economy, in order to bring back full
pumped into the national economy employment the state is entitled – and
through interest rate reductions and in exceptional cases even obliged – to
increased money supply, instead of soften recurring phases of intensified
using it for purchases of investment or unemployment through its spending
consumer goods (liquidity trap). This on consumer and capital goods pur-
leads to disturbances in the circular chases. This school of thought forms
flow of income and triggers recurring the basis of the Stability and Growth
situations of imbalance. Act which came into force in 1967, but
The significance of demand, the which by the late 1970s had already lost
tendency of a free market to become its impact on account of the fact that
unstable, and the ineffectiveness of both the underlying concept and the
monetary policy measures during an economic policy instruments had
economic downturn or low point, are become obsolete.
the reasons why Keynes puts great The politics of demand of Keynes-
emphasis on an anti-cyclical fiscal poli- ianism were replaced by politics of
Labour law 295
supply, which consider monetary and Labour law

anti-inflationary policies as well as non-
governmental activities as potentially Labour law regulates the relationship
more effective. between employees and employers. A
There are many fundamental differ- difference has to be made between indi-
ences of opinion between the two views vidual labour law (the legal relationship
and therefore the main economic poli- between the individual employee and
cy instruments also differ. Keynesian- his/her employer), collective labour law
ism relies on state-implemented fiscal (the legal relationship based on shop
policy, and →monetarism favours politi- floor agreements, collective agreements
cal control of the money supply or corresponding agreements for the
through the central bank as well as mar- public service) and →occupational health
ket-inherent incentives. Depending on and safety regulations for the protection
the view they support, representatives for the employees.
of the different strategic policies for sta- One part of labour law is based on
bilising business cycles are referred to as national regulations (laws and regula-
Keynesians, fiscalists or monetarists. tions), while the other part consists of
The academic debate around the autonomous regulations by the
further development of Keynesian involved parties that are legally binding
teachings concentrates on an improved for those concerned (single contracts,
microeconomic foundation for the plant agreements, collective agree-
assumptions and effect relationships, as ments, directives by the professional
well as on the underlying reasons for associations). Moreover, labour law is
wage and price rigidities by contractual more strongly influenced by precedents
commitments. (case law) than other areas of jurisdic-
tion. This applies in particular to collec-
REFERENCES: tive labour law and to →industrial action,
BOMBACH, G. et al (ed), (1981), Der which is not legally regulated. For dis-
Keynesianismus I, Nachdruck der 1st edition, putes between those involved, the
1976, Berlin, New York, Heidelberg; JAR-
labour courts are responsible.
CHOW, H.-J (1994), Der Keynesianismus,
Collective legal agreements can also
in: Issing, O. (ed), Geschichte der
Nationalökonomie, 3rd edition, Munich, pp.
be reached through a conciliation pro-
193-213, (4th edition forthcoming); KOLB, cedure. For approximately two-thirds
G. (1997), Geschichte der Volkwirtschaftslehre: of all collective agreements, conciliation
dogmenhistorische Positionen des ökonomischen procedures are mediated between the
Denkens, Munich, pp. 142-153. →social partners, which are supposed to
contribute to the out-of-court settle-
Adolf Wagner ment of conflicts of interest. However,
Sabine Klinger agreement suggestions submitted by
arbitration boards are not binding.
Some individual German states have a
conciliation procedure, which is also
not binding for the partners in a wage
agreement.
296 Labour law
Initially, labour law was mainly other respects, the favourability princi-
intended to protect the worker against ple applies to the workers: any regula-
prejudice, economic disadvantages and tions over and above the collective
occupational hazards. Today it is agreement or the plant agreement con-
focused on a more comprehensive cerning them have to be advantageous.
organisation of all aspects of working The fast pace of change in the work-
life. State legislation is merely setting ing world – the development of new
minimum standards, such as maximum branches of industry, a growing services
permissible working hours, paid mini- sector, the decline of the traditional areas
mum leave, terms of notice and contin- of production, a lower level of organisa-
ued salary payment in the event of ill- tion on both sides of industry – keeps
ness. In all other respects, it is up to the labour law in constant flux. Both the
parties concerned to adjust working autonomous regulations of the parties
conditions to their needs, specifying involved and case law ensure that adjust-
above all the type and extent of work, ments are up-to-date and practical.
the level of remuneration, vacation Besides, international legal sources
entitlement or potential extras. are gaining increasing importance.
For most industries, working condi- Agreements by the →International
tions are regulated by collective agree- Labour Organization become binding
ments, which in principle are only only when they have been ratified and
binding for the companies belonging to converted to national law. Usually,
an employers’ association and repre- however, German legislation is already
senting one of the parties to the agree- in step with the respective agreement at
ment. In terms of the law, a collective the time of ratification. By contrast,
agreement only pertains to the mem- →European Union regulations have a
bers of the tariff-bound trade unions, more direct impact on the national
even on the part of the workers; in fact, labour law – especially guidelines on
however, the regulations apply to all gender equality (regarding remunera-
workers. Apart from collective wage tion, vocational training, job access and
and salary agreements, there are working conditions), work time organ-
numerous agreements regarding extras isation and minimum leave. European
(e.g. leave pay, continuation of wage works councils or the EU Directive on
payment, benefits for private capital the Posting of Workers are of seminal
accumulation). importance.
Both collective agreements The 1989 Community Charter on
(between employers and trade unions) the social fundamental rights of work-
and plant agreements (between ers as well as the memorandum
employers and works councils) can be attached to the Maastricht Treaty and
finalised at company level. Collective the agreement on →social policy also
agreements and plant agreements have contribute to the ongoing adjustment
immediate validity and do not require of minimum labour law standards in
contractual form in the case of every the member states. Due to the high
employee. But at the same time they density of European legal regulations,
cannot override national law. In all harmonisation in the realm of technical
industrial safety has progressed particu- towards future developments in the

larly far. area of gainful employment.
Early on in the industrialisation
REFERENCES: phase, a capitalistic free market econo-
SCHAUB, G. (2000), Arbeitsrechts- my devoid of any form of checks and
Handbuch, 9th edition, Munich; LEINE- balances, combined with an enormous
MANN, W. (ed) (1997), Kasseler Handbuch
surplus of labour, led to the phenome-
zum Arbeitsrecht, Neuwied; DIETRICH,
non in the working class of what has
T./HANAU, P./ SCHAUB, G. (1998),
Erfurter Kommentar zum Arbeitsrecht, Munich.
been called ‘proletarity’ (Götz →Briefs).
The first reaction to this was the
Gernot Fritz national prohibition of child labour. At
the same time, labour market regula-
tions, which initially seemed to go
against ‘the interests of the economy’,
Labour market order were found to result in greater prosper-
ity in the long run (both macro- and
The conception of the →social market micro-economically).
economy intends to marry the economic Despite continually high levels of
efficiency of a liberal →market economy →unemployment, a shrinking and ageing
with social protection and balancing population (as in practically all highly
(Alfred →Müller-Armack). In terms of developed countries) means that 21st
the theoretical background of this con- century Germany is faced with the
ception, the traditional 19th century spectre of a shortage of available labour.
solution to the problems of the worker It is true that the radical, historic change
through →social policy has become a from a surplus to the scarcity of (at least
central concern of the economic and marginally qualified) labour prepares
social order. the ground for the implementation of
The conception of an economically the items on the agenda of a socially-
efficient but equally ‘socially fair’ and minded government. On the opposite
humane competitive order was side lurks the danger of market failure
described in great systematic detail, par- or unsatisfactory welfare interventions
ticularly by Walter →Eucken. It in the labour market.
embraces a group of constituent and Notwithstanding further advances
regulating principles that are to be regarding the qualifications and inde-
understood as a unit, and that also rep- pendence/coming-of-age of workers, or
resent a specific type of labour market rather →managers of their own human
organisation. The specific labour mar- capital, a minimum of special regula-
ket organisation of the social market tions in the employment sector is indis-
economy is aimed at solving the prob- pensable for the following reasons:
lems posed by the historical social ques-
tion. The labour market organisation, • For the majority of employed persons
by forming an integral part of an organ- and households, earned income
isational conception open to the future, remains the dominant basis of exis-
must however also show openness tence, so that once again an asymme-
298 Labour market order
try of power between supply (work- any economic system with free and
ers) and demand (business) in the job equal citizens, a minimum of regula-
market, and also an anomaly of sup- tions would emerge in the work sector,
ply (increase of available labour with and, due to the economic advantages
decreasing remuneration rates) can for both sides of the market, that it
be detected. These abnormalities are would also persist.
the reason why officially binding On the basis of the right to free per-
rules governing wage determination sonal expression, equality before the
in the labour market are necessary law, the right to private property, free-
and why certain groups require spe- dom of trade, the right to free speech,
cial protection. the right to free choice of occupation
and place of work, and also on the basis
• Apart from the usual personal risks of the national responsibility for an
(health and the need for nursing care, overall economic equilibrium, the
disability, old age), the collectively labour market organisation in Germany
interdependent risks of unemploy- could be built on five columns:
ment or a lack of orders in the event
of an economic, structural or growth • The autonomous wage bargaining
crisis, persist. (collective industrial law), which
according to the subsidiarity principle
• Work is not a uniform ‘product’ but is leaves the agreement of minimum
characterised by differences in qualifi- standards for individual employment
cation; certain forms of work and contracts to the bargaining parties
their rewards can only be roughly involved (trade unions, employers’
defined in a general work contract. associations, →social partnership). In
Despite the possibilities of modern collective bargaining, a conflict of
information and communication interests and distribution is assumed.
technologies, a labour market in its Therefore, the bargaining parties are
entirety (which exists as a mental con- (apart from the obligation to keep the
struct only) will never be completely peace) entitled to the free manage-
transparent and comprehensible. ment of their interactions, even up to
the point where they resort to
• People have to choose occupations →industrial action (strike, lockout) as a
and decide which qualifications to last weapon in the conflict. Collective
get, without knowing under what agreements are binding for members
conditions and for how long they will of the two sides of industry; devia-
be able to use them. This is why pru- tions are only possible in favour of
dent workers and businesses will only the worker (favourability principle).
invest adequately in the acquisition of Whether negotiations are conducted
qualifications (human capital) in in a centralised or decentralised man-
times when a certain stability of the ner, and also the degree of differenti-
conditions of employment prevails. ation and flexibility of the collective
agreements, depends on the aims and
For these reasons, it is likely that in statutes of the trade unions and the
employers’ associations as well as on social degradation (since the abolition

the →collective agreements. of the obligation to accept unreason-
able job offers), through payments of
• The desire to overcome the situation wage compensation (unemployment
of the worker as an object within the pay, unemployment relief) and by
modern labour organisation is taking care of pension and health
achieved by worker participation at insurance contributions (→unemploy-
management level (→co-determin- ment: social security).
ation) and in the company as a whole.
In contrast to the relationship in a Labour market organisation has
collective agreement, the relationship been codified in the collective and the
between the works council and man- individual sectors of industrial law, and
agement strives to maintain trust and is constantly progressing in the light of
cooperation. Plant agreements can fill legal precedents and innovations intro-
in the blanks left by the bargaining duced by the two sides of industry. In
parties (opening clauses) in terms of this way, it was and continues to be pos-
company requirements. sible for the two sides of industry to
develop, without outside interference,
• Apart from tariff standards, legal much of the increased complexity and
worker protection standards (e.g. for flexibility of collective agreements
severely disabled individuals, children which the economic literature calls for.
and adolescents, maternity leave; pro- The organisation of the two sides of
tection against unfair dismissal, work industry was set in motion more and
time protection, minimum leave; more by the transformation of the cate-
occupational hazard and health pro- gories of occupational structures and
tection) reinforce tariff standards and also through processes of corporate
areas of occupation which lack organ- organisation.
isation, downwards (often more The fact that today neither workers
favourable tariff standards apply nor employers are automatically pre-
upwards, vide worker protection). pared to join labour organisations (in
particular in the new German states),
• The →Federal Employment Agency is an combined with the increasing impor-
institution which serves the labour tance of new forms of independent
market by communicating informa- gainful employment, will cause further
tion, offering career guidance and as adjustments of the institutions and new
an employment agency. It also pro- forms of labour market regulations.
motes the acquisition of further qual-
REFERENCES:
ifications and supports mobility, and
FRANZ, W. (1999), Arbeitsmarktökonomik,
through all these measures helps to
4th revised edition, Berlin; KLEINHENZ,
even out imbalances between supply G. (1997), Sozialstaatlichkeit in der
and demand in the labour market. Konzeption der Sozialen Marktwirtschaft,
in: Kleinhenz, G. et al (ed), Sozialstaat
• In the event of unemployment, Deutschland. Jahrbücher für Nationalökonomie
unemployment insurance prevents und Statistik, 216 (4 + 5), Stuttgart, pp.
300 Labour market policy
392ff.: KLEINHENZ, G. (1979), other conditions responsible for a func-

Verfassung und Struktur der Arbeitsmärkte tioning labour market. It thus concerns
in marktwirtschaftlichen Systemen in: the entire institutional-legal set of rules
Lampert, H. (ed), Arbeitsmarktpolitik,
of the labour market, which represents
Stuttgart, New York, pp. 8ff.
the framework within which employ-
ees and businesses have to make their
decisions.
In terms of legislation, labour policy
(in the economic sense) should focus
Labour market policy its measures on the limitation of feder-
ation-oriented control by promoting
Labour market policy from the economic outsider competition (for example, by
perspective giving individual and collective agree-
The ability of the labour market to ments equal standing in terms of the
function and the motivational struc- collective agreements law). At the same
tures of those involved in the labour time, it should improve the incentive
market are restricted by complex sets of structure in the social security system
rules, above all the collective agreement through reforms leading to increased
law, the Industrial Constitution Law, flexibility and adaptability, with the goal
the co-determination regulations, the of giving the individual employee more
protection against unfair dismissal reg- scope (e.g. concerning wages, working
ulations as well as the regulations for hours and geographical and sector-
unemployment benefit and the social related mobility, as well as mobility in
security assistance rules. terms of training and qualifications).
The German labour market regula- This is necessary in order to
tions prefer collective over decen- mobilise market forces and for their
tralised and company-friendly regula- potential to reduce →unemployment and
tions for wage and working conditions; increase →employment.
it supports and protects the collective
(i.e. focused on federations) controlling Labour market policy in the literal sense
power of trade unions and employers’ It must be said that labour market poli-
associations. cy tends to be interpreted too narrowly
Through this market structure, and is often limited to repair measures
→competition on the labour market is on the part of the authorities. These
strongly limited so that spontaneous look for specific characteristics if and
processes of correction, which are usu- when unemployment already exists.
ally caused by price reactions in the A difference must be made between
markets, are blocked. passive and active labour policy. While
Just as order frameworks aim at pro- passive labour policy basically aims at
moting a workable competition in mar- stabilising the financial situation of
kets, labour policy should aim at unemployed persons, it is the main
improving the transparency of the objective of active labour policy to rein-
labour market, the mobility of the eco- tegrate unemployed persons who are
nomic agents, wage flexibility and the hard to accommodate into normal con-
ditions of employment. This eases the to minimise financial risks from tempo-
transition into the new job and shortens rary unemployment and to bridge the
the phase of unemployment. gap until they find a suitable new job,
Both elements of labour market without having to fall back directly on
policy are legally enshrined in the legis- support benefits which are funded by
lation for employment promotion tax money.
(Social Security Code, III). Making The striking (negative) effect of the
both elements of labour market policy a duration and level of income compen-
practical reality is the task of the sations, particularly on the attitude of
→Federal Employment Agency in individual employees and/or unem-
Nürnberg. Regarding labour policy, the ployed persons and on that of the bar-
Federal Employment Agency has the gaining partners, has attracted criticism.
following areas of responsibility: career It makes them reluctant to hold back
guidance; the provision of places of wages and it makes them less adaptable.
work and training; guidance leading to Economists call such behaviour moral
better employment opportunities; and temptation (moral hazard). In order to
other forms of promoting work integra- avoid this it would be helpful to
tion. strengthen the insurance character of
The instruments of the passive the unemployment insurance, which
labour policy are: unemployment pay, means that duration and level of the
unemployment aid, short-term money, payments would depend on different
insolvency allowance and winter bonus. rates of contribution. This would mean
The instruments utilised by labour pol- that employees and workers who do
icy are: job creation measures; promo- have a job would continue to be subject
tion of →vocational training and further to compulsory insurance, but at the
education; training measures; support of same time they would be free to choose
consultation and provision; mobility between different payment options.
assistance; integration subsidies; assis-
tance to establish self-employment; Effectiveness and efficiency of active
staff employment subsidies for new labour policy
businesses; the fight against long-term An evaluation of active labour policy
unemployment; integration contracts; meets with substantial statistical prob-
and the promotion of structural adjust- lems since important data of economic
ment measures. research are not generally available. The
Federal Employment Agency assesses
Criticism of income loss compensation its activities on the basis of indicators,
The high level of unemployment and which show how many participants
the growing likelihood (in the future have been taken off the unemployment
probably) for many employees of register six months after completion of
becoming unemployed once, or even a measure (remaining ratio), and also of
several times, during their working life, indicators giving the percentage of par-
highlights the need for an adequately ticipants who are working a certain time
conceptualised unemployment insur- after the completion of a measure (inte-
ance. This should permit the employed gration ratio).
302 Labour market policy
In the opinion of the →Council of on account of the dramatic employ-

Experts for the investigation of overall ment break-downs they were applied
economic development, the remaining with particular frequency.
ratio says nothing about the fulfilment According to these data, participants
of the actual requirements of the labour in these measures are less likely to find
policy, and thus about the transition of a new job than non-participants. If pos-
persons to a regular occupation or itive results are noted, it seems probable
about the improvement of their re- that this is due to an impending expiry
employment chances, since participants of benefits rather than to the participa-
may also (e.g. because they lost the tion in the measure. It seems obvious
courage) have quietly withdrawn or that the individuals concerned only
gone into early retirement. make renewed efforts to secure a job
For neither of the two indicators has when their financial support is coming
a comparison been drawn with persons to an end.
who after a period of unemployment, Macroeconomic investigations (in-
found a new job without participation volving all of the economy) on the
in a labour policy measure. Besides, in whole paint a slightly more positive pic-
the opinion of the Council of Experts ture: in the majority of cases, job
they do not give any indication as to the creation measures have been associated
effectiveness of a measure, i.e. whether with a decrease of structural unemploy-
a less costly integration process might ment. Measures for the promotion of
have been possible. vocational further training have been
Studies on the effects of the promo- credited with a lowering of regional
tion of →vocational training and further long-term unemployment.
education and job creation measures are
either focused on the micro level and Conclusion
the individuals concerned and on con- It is widely accepted that government
trol groups, or on the economy as a interventions are guided by the princi-
whole. ple of helping the unemployed to
Regarding the measures promoting become more competitive in the job
skills training, the outcomes are pre- market rather than merely to assist
dominantly negative; it is frequently them financially. This general argument
seen that as a result of these measures forms the basis of active labour policy.
the individuals concerned find them- Labour market policy will also have
selves in a job market situation which is to persevere in its attempts to make the
worse than before. Only for certain integration into the regular job market
special groups, such as people with very easier for the unemployed. This is par-
few skills, is this labour policy measure ticularly urgent in the case of people
associated with a better chance of find- who are affected or threatened by long-
ing employment. term unemployment. But it must be
Outcomes of job creation measures taken into account that not everyone
are so far only available in the form of has the talent or the will to gain voca-
individual data, and thus at the micro tional qualifications or to retrain, and
level, for former East Germany where some qualifications will not be what the
Liberalism 303
job market actually needs. Job creation tions. This should at least prevent the
measures cannot provide new, lucrative use of active labour policy measures as a
jobs; they can, on the contrary, have a vehicle for renewed claims of unem-
depleting effect, which is one of the ployment pay when, really, they should
problems facing normal occupation in be an instrument for successful integra-
the private sector. tion into the official job market.
The Organisation for Economic
Cooperation and Development REFERENCES:
(OECD), the ‘think tank’ of the indus- SCHMIDT, C M./ZIMMERMANN, K.

trialised nations, has spelled out in its F./FERTIG, M./ KLUVE, J. (2001),
reports on the different countries that Perspektiven der Arbeitsmarktpolitik. Interna-
tionaler Vergleich für Deutschland, Berlin,
active labour policy measures tend to
Heidelberg; SACHVERSTÄNDIGENRAT
lack detailed planning, effective imple-
zur Begutachtung der gesamtwirtschaft-
mentation as well as satisfactory super- lichen Entwicklung (2000), Chancen auf
vision. einem höheren Wachstumspfad, Jahresgutachten
It became apparent that the most 2000/2001, Stuttgart, p. 85 f.; SOLTWEDEL,
effective measures are specifically tai- R. (1997), Dynamik der Märkte – Solidarität des
lored for and focused on groups sharing Sozialen. Leitbild für eine Reform der
similar occupational problems. Their Institutionen. Kieler Discussion contribution
content and methodology should be 297/298, Kiel, pp. 19-33.
clear and precise in design and must be
implemented in a strongly work-orien- Rüdiger Soltwedel
tated environment.
By contrast, large-scale training pro-
grammes taking place in a class-room Liberalism
setting and aimed at adults with little
training or long-standing unemployed The political and economic concept of
persons did not yield much success. In liberalism (Latin liberalis = that which is
addition, measures aimed at adolescents appropriate for the free man) goes back
suffer the drawback that young people to the Enlightenment Era and became
who drop out of school are not easily very popular during the 19th century.
motivated in a class-room environ- Those who pursue liberal ideas seek to
ment. Wage subsidies for the private establish a liberal system in which the
sector and temporary occupation pro- individuality of each human being can
grammes in the public sector are often be expressed and utilised in the social
accompanied by depletion effects, and economic division of labour. The
administrative inertia and problems of state has been given the supreme
stigmatisation. responsibility to protect the civil rights
In order to become more effective, and liberties of its citizens. The tradi-
state employment agencies should be tional, formal distinction between
exposed to competition with private political and economic liberalism con-
and municipal institutions. Consistency siders these two spheres as entirely sep-
of execution can be improved through arate from each other and misjudges the
the implementation of plausible sanc- common elements.
304 Liberalism
Aristotle (BC 384–322) is one of the introduction of liberal constitutions,

early thinkers of antiquity and at the characterised by greater rights for the
same time a forerunner of political and common people and liberal economic
economic liberalism. He sees man as a systems, particularly concerning inter-
zoon politikon, a social creature, but at national trade.
the same time part of a political system In the late 19th century, the shrink-
characterised by the ideal of individual ing membership of the liberal parties,
liberty and equality, and ruled by a law reactionary currents and workers’
established by man himself. movements led to the displacement of
The early liberal movement had its liberalism. Disappointments about the
beginnings in the 16th century with the effects of an economic policy of ‘laissez-
Enlightenment and the Renaissance as a faire’ and the illusion of a naturally self-
‘demand for liberty in relation to the generating economic system led to the
state’ (Alfred →Müller-Armack). John splitting off of economic liberalism
Locke (1632–1704) postulated a social during and after the First World War.
contract as a constitutional government Political liberalism, in contrast to eco-
for the protection of private property nomic liberalism, was converted to a
(→property). Civil laws (the rule of law) policy of interventions and a commer-
and the spontaneous behaviour of peo- cial policy of protectionism.
ple were supposed to shape human On this basis of →interventionism,
actions and make them appropriate for particularly Ludwig von Mises and Max
the respective situation. Weber developed the intellectual basis
One of the early representatives of a of neo-liberalism, which encompasses a
spontaneous, evolutionary order was broad range of ideas and values for a lib-
David Hume (1711–1776). Adam eral political and economic order on the
Smith (1723–1790) with his major basis of a →social market economy. Out of
work The Wealth of Nations and Jeremy it grew the ordo-liberal Freiburg school
Bentham (1748–1832) with the formu- with Walter →Eucken, William →Röpke,
la ‘the greatest happiness of the largest Alfred →Müller-Armack, Franz →Böhm,
number’ (of humans), make the transi- Alexander →Rüstow, Ludwig →Erhard
tion to the classical political liberalism and others, who in the final result
of the late 18th and 19th centuries. introduced the social market economy
German liberalism is based on the con- as a modern economic system into
tributions of Kant, Fichte and Germany.
Humboldt. French liberalism – repre- As a delimitation from classical lib-
sented by the idea of the tripartite pow- eralism, the ordo-liberal school also
ers of the legislature, executive and introduced the term palaeo liberalism
judiciary – is represented by Voltaire, (= old liberalism), which can be
Rousseau and Montesquieu (1689– described as a consistent form of liber-
1755). alism with minimum state interference
The Declaration of Human Rights and without a social element (as it
in France (1789) signalled the begin- seemed desirable during the heyday of
ning of classical liberalism (high liberal- capitalism in the 19th century).
ism) and in the 19th century led to the Friedrich August von →Hayek elaborat-
ed on the idea of a spontaneous, evolu- possible locations so that at any point in

tionary order and, like Karl R. Popper, time all the individual processes in the
the concept of an ‘expansive’ or ‘open’ division of labour work together har-
society with a liberal democratic consti- moniously, regarding material, time and
tution. The idea of the social contract space. This coordination must be
enjoyed a revival through John Rawls, organised in such a way that eventually,
Robert Nozick and James McGill and with minimal environmental
Buchanan. The Chicago school, of impact, finished products result, which
which Milton Friedman is a member, in terms of their nature, quality and
has strong neo-liberal tendencies. quantity assist people to the greatest
possible extent in the realisation of their
REFERENCES: personal, family and collective objec-
REDHEAD, B./STARBATTY, J. (ed) tives (the economic problem of control
(1988), Politische Denker. Von Plato bis Popper, and allocation). The solution to this
Bonn; HASSE, R. H./MOLSBERGER,
problem requires careful planning –
J./WATRIN, C (ed) (1994), Ordnung in
prior to the actual implementation – of
Freiheit: Festgabe für Hans Willgerodt, Stuttgart,
Jena, New York; HAYEK, F. A. von (1991),
how the factors ought to be utilised in
Die Verfassung der Freiheit 3rd edition, each separate step of the divided labour
Tübingen. process.
In terms of the detailed planning of
Ralph G. Anderegg production and goods exchange, the
question of who should ultimately take
the planning decisions can, looking at
past experience, be answered in two
Managing and planning essentially different ways:
Human and material factors of produc- • Planning decisions are made in the
tion – especially labour, land and capital context of the hierarchy of govern-
– are required for the production of ment authorities and concern the
material goods and services. However, economy as a whole. When this hap-
both human and material factors of pens, the entire economic outcome
production are quantitatively and qual- based on this process of planning is
itatively limited (natural resources); mainly aimed at the objectives, which
they are scarce. This equally applies to are of importance to the upper eche-
products made with them. In many lons of this hierarchy (central eco-
cases, however, the factors of produc- nomic planning). They try to gain the
tion can be used for the production of information on which their planning
completely different goods in an econ- decisions are inevitably based
omy based on division of labour. through reports extracted from a net-
This brings up the question of how work of bureaucratic communication
the degree of scarcity of the individual channels, and to achieve coordination
factors and products is best identified, by way of directives. This form of
and how limited quantities of these fac- economic planning entails a number
tors can then be channelled to the best of serious informational and motiva-
306 Managing and planning
tional problems (→socialism/planned based on administrative law (e.g. the

economy). planning of transport routes and con-
struction) and planning based on state
• The divided labour process, by con- law (e.g. educational and defence plan-
trast, is planned independently and ning). The latter form of planning can,
with no official directives in the indi- for the purpose of achieving political
vidual economic units – i.e. enter- objectives, mean that the plans merely
prises, private households and serve as information on politically
autonomous government depart- desirable goals and as motivation to
ments – regarding quantities and others to contribute to their implemen-
prices for individual products and tation, without being binding for the
factors of production. More especial- authorities or even for private citizens
ly, its planning is based on relevant (indicative plans).
information about the economic But the planning that is binding for
environment. The plans are tuned to authorities and private citizens greatly
the goals that the economic agents are restricts their room for manoeuvre in
pursuing at any particular time. The their own planning (imperative plans).
instruments for the acquisition of Here, the boundaries of the market
information and the coordination of economy are getting blurred (decen-
the single plans are the exchange and tralised economic planning).
price formation processes in the mar- When government planning affects
kets of the factors of production increasing numbers of sectors of the
(→labour market system) and of the economy, and when the government
products (= decentralised economic attracts more and more means through
planning; →market economy, →markets taxation, the political planning of eco-
and prices). nomic activities moves increasingly in
the direction of a centrally planned
The term economic planning is also economy (→state revenue).
used in another sense. Apart from the
direct planning of the use of factors of REFERENCES:
production for the production of goods, GUTMANN, G. (1980), Marktwirtschaft,

there are also forms of planning which in: Handwörterbuch der Wirtschaftswissenschaft
(HdWW), 5, Stuttgart, pp. 140-153; —
refer to the political activities of the
(1982), Zentralgeleitete Wirtschaft, in:
state. These are the attempt by the state
HdWW, 9, Stuttgart, pp. 599-616;
to shape the →economic order by setting HENSEL, K. P. (1972), Grundformen der
up legal rules (institutions) which have Wirtschaftsordnung. Marktwirtschaft – Zentral-
an influence on the economic actions of verwaltungswirtschaft, 2nd edition, Munich.
people (→institutional order policy –
Ordnungspolitik. On the other hand, the Gernot Gutmann
state also tries to find ways of directly
influencing the economic process
(→process policy).
Legally, in process policy a distinc-
tion can be made between planning
Market economy 307
Market economy work more productively or to move to

more profitable areas.
‘The key element of economic acting is The main prerequisite for this is
man.’ This means that the economy is private →property, which can be defined
supposed to serve humans and not the as the right of private actors to dispose
other way around. of goods and services. These private
How do we know whether the actors also have to accept the conse-
economy serves humans? quences of their own decisions by being
We look at humans in their role as liable – positively in the form of profits,
consumers. They did work and were negatively in the form of losses – and, in
remunerated for it; now they want to extreme cases, this can mean bankrupt-
look after their personal needs. If they cy. A successful market economy with-
have to search and wait for a long time, out bankruptcies does not exist.
only to return home with nothing or Since in a market economy, produc-
having bought something of inferior tion is structurally flexible and can
quality, then the economy is not serving adapt – through prices as information
humans. signals and prospects of profit as incen-
Inferior goods and long queues tives – to the desires of the consumers
were the economic norm in the practi- (consumer sovereignty), we encounter
cal form of →socialism. Here we the paradox that although this system
encounter the paradox that this eco- was not specially designed for the fulfil-
nomic and social system should have ment of human needs, it does exactly
been specifically designed with people’s that.
needs in mind, but in reality the oppo- Adam Smith (1721–1790), the theo-
site was the case. retician of the market economy, sees the
In the market economy, fluctuating individual producer in a market econo-
prices signal the scarcity of goods to my as being led by an ‘invisible hand’
consumers and producers. If the and generally serving (‘frequently’ in
demand for goods also changes, then the English original) a purpose
their relative price (exchange value) (improved supply of goods) that was
changes: the product more highly in not originally his intention. It can be
demand is sold more expensively – demonstrated that the market economy
measured in units of goods now less in promotes economic and social prosper-
demand – and vice versa. This is how ity because →competition urges, and
producers gather information about the sometimes even forces, the actors to
purchasing intentions of consumers. find better solutions in order to survive
On the one hand, relative price changes the competition, and also that in this
make it worthwhile for the producers way superior products and production
(rising prospects of →profit) to produce procedures are perfected and distrib-
goods that are now more strongly in uted (competition as process of discov-
demand, while on the other hand the ery: Friedrich August von →Hayek).
production of other goods declines; the A market economy and competition
people who produce them will change are also instruments of power control
their methods, i.e. either by trying to and as such they help to protect indi-
308 Market economy and public institutions
vidual liberty (Franz →Böhm). The of a secondhand car), then the buyers
market economy even teaches good must realise that they may be deceived.
morals – in the context of the economy. Certainly, reliability and ethical
The exchange of goods and services in (business) practices are exclusively or
the market, as well as the possibility of a mainly restricted to an environment
drift, force the producer to be honest: regulated by the principles of a state
the promise to render a service and its under the rule of law (governments
fulfilment need to overlap. If the buyer under the rule of law). Otherwise the
can trust the promise, the buyer will cancer of corruption has to be expected.
remain loyal to the producer; if not, the Corruption is levelled against produc-
buyer will go elsewhere. This forces the ers and consumers and enriches those
seller to be reliable and punctual. who break the law with impunity. The
Computer experiments even show the creation of a political system under the
following: ‘honest’ behaviour (overlap rule of law is in turn the consequence
of service promises and fulfilment), as of a liberal institutional order (the high-
long as the exchange partner is also est cultural achievement that one peo-
honest, becomes the norm even in dis- ple can make: Franz →Böhm).
honest population groups. If fraudsters
do business with other fraudsters and REFERENCES:
everyone can be cheated, nobody EUCKEN, W. (1940/1989), Grundlagen der

knows if they are going to derive any Nationalökonomie, 9th edition, Berlin;
HAYEK, F. A. von (1969), Der Wettbewerb
net benefit at the end of the day. It
als Entdeckungsverfahren, in: Freiburger
therefore makes sense for fraudsters to
Studien, Gesammelte Aufsätze von F. A. von
look for deals with honest partners and Hayek, Tübingen; SMITH, A. (1776/1999),
give up fraud; this will save them the An Inquiry into the Nature and Causes of the
high information and transaction costs. Wealth of Nations. Last German edition and
The paradox is therefore that market translation: Der Wohlstand der Nationen: Eine
economies generate and reinforce Untersuchung seiner Natur und Ursachen, 8th
morality by allowing individuals to pur- edition, Munich.
sue their own interests, while it is often
lost in the attempt to divert individuals Joachim Starbatty
from their real interests and train them
to work directly for the common good.
The theory that a market economy Market economy and public
educates the actors to act responsibly institutions
certainly applies only in the continual
give-and-take of mutual actions. Sellers The →market economy requires a stable
want to fulfil buyers’ expectations and legal-institutional framework which the
vice versa because they want to ensure a state can create by making provision for
continued business relationship. But if internal and external security, adminis-
the sellers do not depend on the satis- tration of justice and a suitable infra-
faction of their customers because they structure. The framework is achieved
are closing a deal that will either never through a predictable and reliable pub-
be repeated or will be final (e.g. the sale lic administration, working in the con-
text of tried and tested legal rules, equal measure, their understanding of
which can be changed only after careful how to apply the law is diminishing as
examination. The police and the judici- well. The administration is setting the
ary, for example, are quite active and norms and playing the role of referee in
agile within these rules. Independent the market as well as being a privileged
courts can investigate whether the rules fellow player who can hide its own or
are being observed. This does not ham- others’ economic mistakes by changing
per the economic process but it pro- the rules. The need for supervision
vides a system for avoiding rule makes additional quality demands on
infringements. The more economically administrations, which become inflated
government tasks and administration and have to resort to less-talented pub-
are assessed, the higher the standards lic servants. The increasing specialisa-
which the government can apply in the tion of departments requires coordina-
selection of its officials, as long as it tion of the smallest decisions. This is
offers competitive salaries. how policy deprives the market of its
The modern →welfare state wants to control functions. In the same way as
control the economic process through →social policy, extensive public provision
‘interventions’ (→interventionism) and for subsistence is also becoming more
its own economic activities, but it gives unpredictable.
up the principle of continuity if it tries In a centrally administered econo-
to adapt to the continually changing my, the economic process is seemingly
economic conditions. Formally, the less complicated in that it is directly
market is maintained while the state is controlled through comprehensive
constantly changing its rules with the state planning (→planned economy). A
result that investments and the compet- general judicial examination of public
itive process become ever riskier. administrative measures is excluded,
The constitutional state and the since otherwise the central control of
division of power are outwardly main- the economic process would become
tained, but legal regulations are becom- impossible. An interruption while a
ing ever more numerous, complicated final judicial ruling and new plans are
and short-lived. The legislator who passed would be unacceptable.
cannot live up to the increased demands In a planned economy, the division
which accompany the planned fine- of power and the constitutional state are
tuning of the economic process is dele- replaced by the duty to obey organisa-
gating (as in the →European Union) a tional rules and, if absolutely necessary,
large part of the law-making to the the possibility to make a complaint. To
executive. To have to learn new regula- that extent the administration has more
tions is laborious and expensive, not room for manoeuvre. But it has none of
only for the economy but also for the the information that the market would
administration. What was legal and otherwise have supplied. It is tied to
brought →profit yesterday has become rigid planning and suffers from a fear of
illegal and loss making today. Citizens’ risk-taking, which is typical of the
plans are less secure; their feeling of lower government departments. Only
right and wrong is decreasing and, in at the expense of other goals and under
310 Market mechanism
political pressure and one-sided con- become so overly mathematical might

centration of means, can it be motivat- have contributed to the fact that the
ed to excellence (for example, space great variety of causal relationships, as
travel) in certain areas (→socialism). well as all the acting participants
involved, can no longer be seen clearly.
REFERENCES: Since it is extremely difficult to iso-
WILLGERODT, H. (1979), Wirtschafts- late an economic cause-and-effect rela-
ordnung und Staatsverwaltung, Ordo 30, pp. tionship due to the enormous complex-
199-217.
ity of economic processes, economic
theorists strip them, for the purposes of
Hans Willgerodt
analysis, of all other (actually existing)
factors by accepting these as unchanged
and leaving them out of the equation
Market mechanism (subtracting these factors). In the case
of such highly abstract theoretical mod-
When economists discuss theoretical els, it is possible to show in a graph how
problems they frequently use the term an economic entity (e.g. demand)
‘mechanism’, particularly in the phrase changes if one component (e.g. price) is
‘market mechanism’. If it is not used altered (→supply and demand). Graphs of
with care, however, the result can be this kind are used particularly in eco-
that the underlying processes are not nomic theory, but frequently without a
properly understood. The association clear explanation of the parameters on
with ‘mechanism’ links market process- which they are based.
es to mechanical operations, which are This is obvious in the case of homo
characterised by a predetermined rela- economicus, a virtual participant in the
tionship between cause and effect. economy. They only act in economic
The outspoken opponents of a free categories and their objectives are fixed
market system (→socialism) and other (e.g. needs maximisation as a consumer,
critics who demand that economic profit maximisation as a producer).
activities should adhere to ethical prin- Such assumptions allow clear solutions
ciples and goals (→Catholic social doc- (statements, results) in certain model
trines, →Protestant social ethics) have situations.
accused economics in both its scientific This type of procedure is in some
and practical forms of being mechanis- ways directly analogous to laboratory
tic and materialistic. tests in other scientific disciplines and
As a concept of economic and polit- helps to clarify fundamental relation-
ical struggle, these accusations are often ships. It is only in these theoretical
subsumed under the keyword ‘neo-lib- models that one can talk about mecha-
eralism’ (→liberalism, →social market nisms, but not when one is dealing with
economy). But economists contribute to actual people in the real world (of eco-
this distorted view if they do not suffi- nomics). The actual life in a society and
ciently explain the principles of eco- the behaviour of real people in the
nomic processes and decision-making. economy can only be partially captured
In addition, the fact that economics has by models of this sort. Nor does it
become sufficiently clear that models neurs; managers on behalf of their enter-
based on assumed behaviour lead to prise or its owners, trade unions for
solutions that can be considered as the employees, politicians and state officials
norm, but that the solutions change if a on behalf of the citizens).
different behaviour pattern is assumed If individuals are acting for them-
and this is then regarded as the excep- selves as consumers or sole traders,
tion to the rule. their interests are clear. In the case of
Accordingly, it is the norm that people who act on behalf of others as
there is less demand for a certain prod- their representatives, it is more difficult
uct when its price is going up (regular to determine which issues should take
effect). Notwithstanding this reaction priority in the decision-making process
of the majority of the buyers, however, – e.g. the interests which the acting
someone may decide to do exactly the subject attributes to the represented
opposite and to demand more of this group or institution or their personal
product precisely because only few peo- self-interest (→institutional economics).
ple are able to afford it (snob effect). All economic agents, enterprises
This reaction is definitely the excep- and institutions act through people.
tion, seen in the light of the regular The perception of the individual on
behaviour of the ‘normal’ consumer. which economic theory has based its
This can even be due to a rational deci- assumption of behaviour, is the mature
sion, if all buyers want to have more of citizen who acts rationally with his/her
a certain product despite increasing economic interests at heart. Limits are
prices. This is significant if all buyers imposed on their actions by written and
proceed from the expectation that the unwritten rules, and moral and ethical
price will continue to go up. In such a standards.
market situation, the rational and nor- Even if the market-players take each
mal decision would be to demand more case at face value, forecasts of the
of a product in order to avoid the antic- behaviour of market participants under
ipated further price increases, if one standard conditions are nevertheless
cannot live without it. very reliable. Human behaviour has
It is becoming obvious that eco- been empirically observed over cen-
nomic theory is behavioural theory. turies – it is therefore safe to make cer-
The factors affecting the behaviour of tain basic statements about patterns of
economic agents in relation to econom- reaction which form the background
ic circumstances vary – e.g. the market for reliable rules and predictions.
situation, the way it is perceived by the Economic findings and instruments
decision-maker and the status of infor- are also usefully applied in other social
mation, objectives and interests of the sciences – e.g. in political science and
acting subject, and many other issues. scientific social research. And yet, one is
The eventual decision depends on all not really describing a mechanism in
these factors. The participants are the true sense of the word since many
always people who are acting either on different people take different decisions
their own behalf or on behalf of others under ever-changing circumstances.
(parents for their children, →entrepre- This should never be forgotten if mis-
312 Markets and prices
understandings and misinterpretations tinuing search and discovery process

of the term ‘market mechanism’ are to therefore takes place in order to find the
be avoided. best possible deals in the markets.
During these market processes, enter-
Hermann Schneider prises that are innovative and dynamic
and do not shy away from risk usually
have particularly positive results. They
Markets and prices offer new products and also open up
new markets.
The market is the place where →supply Initially, sellers of a new product are
and demand meet. Exchanges are agreed. alone in the market and have a monop-
In the goods markets, consumers (as oly. As they have no direct competition,
buyers) exchange money with the the monopolists can charge relatively
enterprises (as seller) for consumer high prices. Market supplies can be
goods. On the factor markets, the arranged in such a way that (maximum)
enterprises (as buyers) acquire the fac- monopoly profits are made. As soon as
tors of production and material capital other enterprises take up production,
in order to use them for the production this changes. A small group of sellers
of consumer goods. Beyond this, there forms an oligopoly. Such a market can
are special markets – e.g. for loans (the generate particularly intense →competi-
offer of money in return for interest tion. Every action a seller undertakes
payments from the buyer of the loan), (e.g. a price reduction), affects the mar-
for foreign exchange (offer of a nation- ket success of the few competitors so
al currency in exchange for another strongly that these competitors react
currency) or for stocks and shares immediately with a price reduction or
(through the buying and selling of another improvement to the supply.
shares). If, however, very many sellers are
The fact that supply and demand active in a market, the decisions of one
change over time is characteristic of single enterprise are hardly noticed by
most markets. The demand for certain the others. Here one is dealing with a
goods can increase, if private →incomes polypoly, where an individual competi-
rise or if other consumer goods go up in tor is only one of many and cannot
price. Certain goods can be in greater affect prices. His products have to fit in
supply because the factors of produc- with the market price, which in turn is
tion are becoming cheaper, with the the result of the anonymous interaction
consequence that more enterprises of total offer and total demand.
enter into production. Whether new sellers find it difficult
Such changes mean that despite the or easy to enter an existing market also
fact that the market always appears to be has an impact on market development
on the verge of reaching equilibrium of (→open market: market entry, market exit).
offer and demand, actual market equi- Market entry can be obstructed, for
librium is achieved only rarely. Both example, because the established enter-
buyers and sellers tend to be unsure prises are the only ones to have the nec-
about the exact market situation. A con- essary factors of production (such as
Media policy 313
highly qualified employees), or because deceased artist) and cannot be

they have developed a close relationship increased. In such cases the price finds
with their customers. If the market its own equilibrium at a level where
entry is problem-free, even a monopo- demand and supply are just equal (price
list cannot charge hyper-inflated prices, equilibrium). This has the advantage
but he/she must always count on the that those for whom the satisfaction of
fact that new enterprises (newcomers) their need relative to their income is the
with lower prices could displace greatest get the scarce product.
him/her. Such markets become more
competitive due to potential competi- REFERENCES:
tors waiting in the wings for their BARTLING, H./LUZIUS, F. (2002),

chance to enter the market. Thus the Grundzüge der Volkwirtschaftslehre, 14th edi-
tion, Munich; FEHL, U./OBERENDER, P.
incentive and control effect of the free
(2002), Grundlagen der Mikroökonomie, 8th
market remains.
edition, Munich; WIED-NEBBELING, S.
In addition, the monopolist is ham- (1997), Markt- und Preistheorie, 3rd edition,
pered by the fact that the buyer could Berlin.
go to the sellers of other goods which
satisfy their needs equally well (substi- Hans Peter Seitel
tution goods). For such decisions, the
relative price difference between the
different products is important. At the
same time, consumers do not always Media policy
regard different products as exchange-
able, so that this market process The term media policy refers to all gov-
becomes only partly effective. A buyer ernment activities that are directly or
of domestic products can also move on indirectly aimed at the organisation of
to foreign goods if there is free interna- the national communications or media
tional trade. systems.
Besides, the markets not only deter- In contradistinction to the media for
mine the price of a certain product; the individual communication, such as the
success of an enterprise also rests on telephone, media policy concentrates
other characteristics of the products on mainly on the field of the mass media.
offer, apart from the price. These This is traditionally divided into three
include, above all, the quality, but also categories, namely:
the sale and distribution of the goods,
the service offered and often the way • press (particularly newspapers and
they are advertised. The sellers must magazines);
therefore strive to satisfy the demand as • broadcasting (radio broadcasting and
best they can with a favourable combi- television); and
nation of characteristics. • cinema/films.
Normally the supply in a market
increases if prices go up. However, this German media policy is closely
does not apply to goods which are in linked with the general political system.
limited supply (e.g. paintings by a It was crucially influenced by a number
314 Media policy
of fundamental judgments from the important aspect of this system con-

Federal Constitutional Court on the cerns the regulations of the Interstate
interpretation of freedom of opinion, as Broadcasting Agreement to which all
enshrined in Article 5 of the Basic Law, the German states (Länder) are signato-
the freedom of the press mentioned ries. Within the dual broadcasting sys-
therein, as well as the freedom to report tem, both independently operating pro-
through broadcast and film. ducers and producers who are regis-
The main objective of the media tered in the public law compete with
policy is to safeguard the free formation one another. The private producers are
of an opinion. Since the process of predominantly self-financing through
forming an opinion is markedly influ- income from advertising or direct sub-
enced by the opinions which the mass scription fees (pay TV). In the view of
media carry and present, the court is of the Federal Constitutional Court, this
the opinion that detailed legislative type of funding has a negative impact
measures are necessary to do this suc- on the programme quality. In their
cessfully. Without detailed legislation, it opinion the private producers do not
has been argued, there is the danger of offer a broad variety of programmes but
undue influence, limitation of freedom broadcast only programmes that are
or manipulation of the consumer by attractive to the masses and promise
media producers. high ratings.
Due to the suggestive power of In contrast to the case of the private
moving pictures combined with their producers, by far the largest part of the
almost universal accessibility, this dan- income of the public institutions is
ger is considered to be especially great derived from licence fees. They are
in the realm of television. As a result, exclusively entitled to them, and sub-
media policy is especially focused on scribers have to pay them regardless of
this area. Of the highest importance in whether they make use of their offer-
this regard is the guarantee of a bal- ings or not.
anced representation of opinion across The idea behind this is to offer pro-
the spectrum. grammes independently of financial
Apart from special broadcasting reg- obligations that also cater to minority
ulations that are based on considera- interests. The amount of the licence
tions for publications and their content fees depends on the demand submis-
(the protection of the youth and sions by the public institutions. These
celebrities, the right to reply, journalis- are examined by a group of experts (a
tic due diligence, etc.), media policy commission which assesses the public
provides an entirely appropriate frame- broadcaster’s financial needs) for their
work for protection. plausibility, and approved by the states
In contrast to the press and film in the context of the Interstate
industry that largely function along the Broadcasting Agreement. Beyond that,
lines of market economy principles, the the public broadcasting institutions are
television and radio broadcast sector is equipped with a comprehensive exis-
characterised by the so-called dual tence and development guarantee.
broadcasting system. Legally, the most Unlike their privately funded competi-
Media policy 315
tors, they cannot afford to be drowned tion of the scarce radio and cable trans-
out by competition. mission frequencies.
In return for the fee privilege, it is For the private broadcasting compa-
incumbent upon the public broadcast- nies, specific concentration controls for
ing institutions to ensure the popula- broadcasting have been established to
tion of the basic supply of radio broad- prevent excessive ownership. In con-
casting and television programmes. trast to the general anti-competition
This is not merely a minimum supply law (→concentration), not only the exter-
but covers the entire classical broadcast- nal growth of companies due to merg-
ing range and includes educational, cul- ers and takeovers is supervised, but
tural and entertainment elements as their internal growth too is limited to a
well. maximum market share of 30%.
Owing to the political independ- With a view to the future, the man-
ence of the broadcasting institutions, ner in which German media policy is
which is guaranteed in the Basic Law, organised is being questioned, particu-
the public broadcasting companies are larly due to the progressive develop-
free to determine the content of their ment of new internet-based interactive
basic programmes themselves. In order media. On the one hand, it is to be
to guarantee a broad spectrum of opin- doubted whether the new services still
ions within the programmes that are represent mass media in the traditional
actually presented, the public institu- sense and whether they have a compa-
tions are organised according to plural- rable opinion-forming potential. On
istic principles. the other hand, the international char-
Each institution has a broadcasting acter of digital communication media
council for this purpose (Second means that national media policies
Channel of German Television: increasingly come into conflict with
Television Council). This is made up of legal competence limitations (→globali-
representatives of the socially relevant sation).
groups (political parties, associations,
churches, etc.) and determines, among REFERENCES:
other things, the guidelines for the pro- EICKHOF, N./NEVER, H. (2000),
gramme policy. Rundfunkfreiheit ohne traditionellen
Anstaltsschutz?, Hamburger Jahrbuch für
The regional media authorities that
Wirtschafts- und Gesellschaftspolitik, 45, pp.
were established by the federal states
293-315; HEINRICH, J. (1999), Medien-
and which are likewise internally ökonomie, 2: Hörfunk und Fernsehen,
organised according to pluralist princi- Opladen; NEVER, H. (2001), Meinungs-
ples, supervise adherence to the content freiheit, Wettbewerb und Machtversagen im
regulations of the Interstate Broad- Rundfunk, dissertation, University of
casting Agreement by the private com- Potsdam.
panies. At the same time they also
licence the private producers. This Norbert Eickhof
includes making a selection from Henning Never
among the various applicants for a
broadcasting licence and the distribu-
316 Middle class policy
Middle class policy are subject to death duties once per

generation.
Middle class policy is about special eco-
nomic policies for the independent • While international companies are
middle classes, which constitute 96% of able to move their profits around the
all business establishments in Germany. world, medium-sized companies
The middle class represents a heteroge- generally stay in the country, accessi-
neous group; it is made up of the trades, ble to the treasury and therefore car-
retail, independent professions, service rying more than two-thirds of the
industries as well as small and medium- burden of public finance.
sized enterprises (SMEs) in the pro-
cessing industry, up to a company size A market economy can be fair only
of 500 staff members. in a climate of equal opportunity.
The success of a →market economy Middle class policies are therefore sup-
depends on the success of its →competi- posed to protect the equal opportunities
tion, and this depends on the number of SMEs. To this end, there are the fol-
and the competitive ability of its SMEs. lowing:
The world of politics is largely
dominated by →public enterprises or by • SME promotion laws, which stipu-
large finance companies, with the result late order volumes for public tenders
that many general laws have an adverse appropriate for SMEs.
effect on the middle class:
• The privatisation of public service
• The same bureaucratic requirements sectors, which creates equal opportu-
are a greater burden for smaller busi- nities for competition in this area.
nesses.
• Cartel and monopoly control, which
• The abuse of a dominant market prevents unfair practices by compa-
position often discriminates against nies that dominate the market.
the middle class (e.g. supplier dis-
crimination). • Government business start-up loans,
because SME owners without their
• Business owners (not managers) are own resources would have no access
the only persons in an executive posi- to the capital market.
tion to be personally liable for the
losses of their enterprise with all their • More →deregulation to reduce the
assets. bureaucratic and administrative bur-
den for SMEs.
• While executive salaries are listed as
company expenditure, the salary of a The political lobby of middle class
business owner is seen as profit and is politics is less influential than the lob-
taxed. bies of the trade unions or big business;
due to participation, employers and
• Only personally owned businesses trade unions have formed a coalition for
Monetarism 317
their dealings with government as the • Inflation is always the consequence of

agent of economic policy. Moreover, a monetary policy which is too
the self-sufficiency of SME entrepre- expansive.
neurs has made their interest groups
split up. But since SMEs employ 80% • Whether a monetary policy is expan-
of the national workforce, they could in sive or contractive – or rather infla-
theory go it alone and mobilise political tionary or deflationary – can most
majorities and a middle class-oriented clearly be seen from the money sup-
economic policy. At present, however, ply (notes, coins and short-term
there is still a lack of awareness that the deposits with the banks). In contrast
interests of the middle classes are high- to this, the interest rate – above all,
ly compatible with the goals of the the long-term interest rate – is a poor
→social market economy. indicator because it not only reflects
The special privileges that powerful the monetary policy but also inflation
interest groups fight for (and win) are and yield expectations, the national
frequently detrimental for the middle budget policy and other things.
classes and their interests. This is why During the world economic crisis, for
middle class politics continues to ask example, interest rates fell to nearly
for fairness, equal opportunities and zero although the monetary policy –
equality in a social market economy. based on the money supply – was
extremely contractive.
REFERENCES:
HAMER, E. (1987), Das mittelständische • The central bank can control the
Unternehmen, Stuttgart; — (2001), Was ist ein money supply very accurately.
Unternehmer?, Munich; — (1996), Mittelstand
und Sozialpolitik, Schriftenreihe des
• In order for the monetary policy not
Mittelstandsinstitutes Niedersachen, Regens-
burg.
to destabilise economic growth and
→employment, the money supply
Eberhard Hamer ought to grow at a constant and pre-
dictable (previously announced) rate.
• In order to ensure that the monetary

Monetarism policy does not destabilise the price
level, the growth of the money supply
Monetarism was born in the 1950s, – i.e. the money offer by the central
1960s and 1970s as a reaction to the bank and the merchant banks – ought
movement called →Keynesianism. The to equal the long-term growth rate of
main representatives of monetarism the money demand, and thus the eco-
include the Nobel laureate Milton nomic production potential.
Friedman (Chicago) and the econo-
mists Harry G. Johnson, Karl Brunner • Changes to the money supply expan-
and Allan H. Meltzer. sion affect economic growth and
Monetarism consists of the follow- employment only if these changes
ing 10 core statements: were not anticipated by the market
318 Monetary order
actors. But even if they were antici- Munich, pp. 47-69; BRUNNER, K. (1973),
pated, the effects will only be tempo- Die monetaristische Revolution in der
rary. When, approximately two years Geldtheorie, in: Kalmbach, P. (ed), Der neue
Monetarismus, Munich, pp. 70-103; JOHN-
later, there has been a permanent
SON, H. G. (1973), Die keynesianische
price level adjustment, economic
Revolution und die monetaristische
growth resumes its usual pattern. Gegenrevolution, in: Kalmbach, P. (ed), Der
neue Monetarismus, Munich, pp. 196-216.
• Changes to the money supply expan-
sion rate tend to be largely anticipated Roland Vaubel
because the market actors remember
the way the central bank acted in the
past.
Monetary order
• Like prices, wages too become adjust-
ed to the monetary policy. It is there- The monetary order incorporates the
fore not possible to lower →unem- fundamental rules governing the organ-
ployment permanently by means of an isation of the monetary system in a
unexpected money supply expansion. country, such as Germany, or a currency
The structural causes of unemploy- area, such as the →European Monetary
ment cannot be eliminated by an Union (EMU). Economies in which
inflationary monetary policy. money is the general means of payment
and means of value preservation are
• If the money supply expansion rate more economically efficient and pros-
rises again and then – partly unex- perous than economies which do not
pectedly – resumes a non-inflationary use money in the process of goods
course, economic growth temporarily exchange (barter economies). The use
slows down, temporarily leading to of money lowers the costs incurred in
the phenomenon of stabilisation the exchange of goods (transaction
unemployment. To that extent, the costs) and makes a higher degree of divi-
monetary policy cannot reduce aver- sion of labour possible, thereby leading
age unemployment in the longer to more prosperity (Adam Smith).
term, but it can be differently spread The economic advantages of money
out over time. can be fully realised only when the
monetary value is stable. Inflation or
• An unsteady monetary policy and an hyperinflation will eliminate these
unstable price level are disconcerting advantages either partially or complete-
for the market actors. They impair ly. A working financial system therefore
overall economic productivity and consists of regulations which ensure
decrease the national income. that the circulation of money in an
economy or in a currency area is steered
REFERENCES: in such a way that →price level stability is
FRIEDMAN, M. (1973), Die Gegen- guaranteed. If the money supply grows
revolution in der Geldtheorie, in: Kalm- too fast (or too slowly) by comparison
bach, P. (ed), Der neue Monetarismus, with the increase of goods and services
Monetary order 319
(real economy), inflation (or deflation) highest monetary decision-making

results. The validity of this relationship group, the board of the German
has in the long term been theoretically Federal Bank, may not be called away
and empirically confirmed by numer- during their period of office.
ous studies.
Metal currency systems of the past • A strict limitation of monetary contri-
were closely tied up with rare metals butions to public household deficits
such as gold (gold currency) or silver in by the German Federal Bank.
the attempt to control the circulating
money supply. Paper currency systems This monetary system was the main
of today have relinquished this connec- reason for the fact that Germany had
tion. This lowers the cost of money one of the lowest rates of inflation
creation and makes it possible to control worldwide during the post-war era. In
its supply on the basis of macroeconom- its practical application, it also proved
ic principles; but it increases the risk of its worth because the financial system
abuse through excessive inflation of the and its institutions enjoyed strong pub-
circulating money supply for political lic support and because it was ascer-
reasons, especially when the central tained that its rules were adhered to, so
bank is subject to government control. that there was a wide consensus of sta-
This became obvious in Germany bility in Germany.
after both the First and the Second Due to the great success of the
World Wars when the central bank had German monetary system, the signato-
been used to finance the wars, with a ries to the Maastricht Treaty agreed to
resulting strong currency devaluation. use it as their model for the creation of
This traumatic experience of the the EMU. For this reason, all the main
almost total loss of the entire money elements of the German financial sys-
capital within one generation resulted tem can also be found in the financial
in a monetary policy in the Federal system of the EMU, sometimes even in
Republic of Germany that was designed a more unequivocal and strict form
to prevent a repeat of this. The main than in the case of the Federal Bank –
elements are as follows: for example, regarding the debarment
against the financing of public house-
• The legal obligation of the →German hold deficits.
Federal Bank to focus its monetary Beyond that, the European mone-
policies above all on the stability of tary system has borrowed many other
the price level. institutional characteristics from the
German monetary system. This is evi-
• The German Federal Bank is inde- dent in the largely identical organisa-
pendent from federal government tional structure of the European
rulings and from orders of other Central Bank (ECB) (→European mone-
institutions (including the Upper tary policy). Thus, the board of directors
House of the German Parliament). – which consists of the president of the
ECB, the deputy president and four
• A requirement that members of the other members – is responsible for the
320 New economy
implementation of the monetary deci- concepts such as the internet economy,

sions that have been taken by the ECB network economy, digital economy, e-
Governing Council. In this top finan- commerce or information economy.
cial decision-making group, besides the Elements which all these terms have in
members of the board of directors there common are the new technologies,
are also the presidents of the national above all information and communica-
central banks of the EMU member tion technologies (ICT), as well as new
states. knowledge and human capital. To put it
Whether, thanks to this far-reaching more simply, the new economy can also
transfer of the German monetary sys- be described as the ICT sector of a
tem to the European level the same national economy.
focus on stability of the ECB will result, What is new in the new economy?
depends on the degree to which this The following elements are relevant:
new economic framework founded at
Maastricht will be politically accepted. • ICT as new technology.
Above all, the outstanding commitment • Information as an increasingly
of monetary policy to the principle of important product.
→price level stability and the independ- • Higher production and growth
ence of the ECB must be respected, the increases due to the above factors.
common objective of stability and
growth must be adhered to, and a per- It is a fact that ICT has created net-
manent consensus on stability in works that are bringing people and
Europe must be reached. enterprises ever closer together, both
nationally and internationally. These
REFERENCES: networks make it possible to transmit
DUWENDAG, D./KETTERER, K. larger quantities of data more cheaply.
H./KÖSTERS, W./POHL, R./SIMMERT, The resulting network effects are char-
D.B. (1999), Geldtheorie und Geldpolitik in
acterised by the fact that the greater the
Europa, 5th edition, Berlin et al;
number of network actors, the greater
GÖRGENS, E./RUCKRIEGEL, K./
SEITZ, F. (2001), Europäische Geldpolitik.
the benefits for each individual actor.
Theorie, Empirie, Praxis, 2nd completely The innovative aspect of informa-
revised edition, Düsseldorf; ISSING, O. tion as a product within the new econ-
(1996), Einführung in die Geldpolitik, 6th edi- omy presumably consists in the fact
tion, Munich. that ICT makes information accessible
faster and cost-effectively, stimulating
Wim Kösters in turn the production and utilisation of
more information. The positive spin-
off of this is that data-processing itself is
getting better all the time. It is often
New economy said that all this can make a national
economy more transparent and less
The concept ‘new economy’ (‘new eco- volatile.
nomics’) has not been clearly defined. Not many sectors of a national
Sometimes it is also associated with economy remain untouched by the
increased productivity and growth that Wirtschaftspolitik, 49(3), pp. 303-312;

ICT and information bring as products. HÜTHER, M. (2000), Neue Ökonomie:
This is why yet another name for ICT Abschied vom Konjunkturzyklus? – Befunde
und Thesen, in: Volkswirtschaftliche
is cross-section technology. By stimu-
Abteilung der DGZ DekaBank (ed),
lating productivity and growth, this
Konjunktur, Zinsen, Währungen, Frankfurt/M.,
technology is promoting prosperity pp. 8-13; STEHR, N. (2000), Information-
both nationally and internationally. stechnologien, Wissen und der Arbeitsmarkt,
It is important to remember that in in: Frankfurter Allgemeine Zeitung, 30 October
the new economy, the same economic 2000, pp. 33.
principles that applied in the ‘old econ-
omy’ have not suddenly been abol- Wolf Schäfer
ished. The United States has, however,
demonstrated more than any other
country that the growth trend in the Nursing care insurance
new economy can be steeper, and that
the growth fluctuations tend to be less Since 1995, the compulsory Nursing
pronounced than in the old economy. Care Insurance Scheme has formed the
At the same time, the inflation rates are fifth column of the social security sys-
clearly lower. It also seems that the tem next to the →pension, →health,
economy has become more flexible and →accident and →unemployment insurance
has adapted more easily to fluctuations schemes. Nursing care insurance was
in the market and that, as a conse- introduced because of the growing
quence, the utilisation of the produc- number of people in need of care. The
tion capacities of an economy can be phenomenon is closely related to the
more even over time. This has a calm- rising proportion of elderly people
ing effect on the business cycle. It also within the population who are not suf-
means that there is less need for short- ficiently insured for the risk of requir-
term interventions in the economic ing nursing care. This problem had
process through monetary and fiscal created an increasing financial burden
policy instruments. for the social services (→basic social secu-
As the mechanisms of the new rity) in the form of expenditure on
economy are becoming more universal- nursing care.
ly accepted, the undoubted effect is The Nursing Care Insurance Act
increased competitiveness of the econ- makes it compulsory for every member
omy as a whole. The terms ‘new econ- of the population to be insured for the
omy’ and →globalisation have a lot in risk of requiring nursing care. Every
common: they are characteristic of the member of the compulsory Health
progression of modern national Insurance Scheme has to take out nurs-
economies towards what we call →sys- ing care insurance coverage. Spouses
tems competition. and children who are not gainfully
employed are co-insured at no extra
REFERENCES: cost. Those members of the population
FREYTAG, A. (2000), Was ist wirklich neu who are not insured through the com-
an der New Economy?, in: Zeitschrift für pulsory Health Insurance Scheme
322 Nursing care insurance
(mainly the self-employed, civil ser- in a nursing home (in-patient care). In

vants and employees with an income principle, those requiring care are enti-
above the liability-to-insure limit) have tled to choose between out-patient and
to present proof that they have taken in-patient care, and if they opt for in-
out a private policy, which offers the patient care they are free to select one of
equivalent quality and extent of nursing the officially licenced institutions.
care. However, if in-patient care is not neces-
The actual execution of nursing care sary, those in need of care are only enti-
insurance is the responsibility of the tled to the services that are offered at
compulsory Nursing Care Insurance the level of out-patient care. A further
Scheme, which legally belongs to the rule that applies to nursing care insur-
umbrella organisation of the compulso- ance is that those in need of care must
ry Health Insurance Scheme, despite make a reasonable contribution to the
being financially independent. The costs of the nursing care (e.g. by carry-
compulsory Nursing Care Insurance is ing the costs for food and accommoda-
funded by income-linked contribution in the case of in-patient care).
tions. Since 1 July 1996, the contribu- The services of nursing care insur-
tion rate has stood at about 1.7% of ance depend on the degree of need.
income up to the monthly contribution This is assessed by the medical service
assessment limit set by the Health of the Health Insurance Scheme. Those
Insurance Scheme (2004: s3,487.50). in need of care are assigned to one of
As in the case of compulsory health three levels of care. In the case of out-
insurance contributions, the Un- patient care, depending upon the level
employment Insurance Scheme takes of care, a monthly contribution of
responsibility for the contributions of s205/410/665 is paid out for material
persons on unemployment benefit. care services (basic care and domestic
Generally, half of the employees’ con- work) to the value of up to s384/
tributions are paid by the employer. In 921/1,432 per month or a combination
order to lighten the load of the addi- of these services, as well as up to four
tional wage costs for employers, con- weeks of holiday replacements to the
currently with the introduction of value of up to s1,432 a year. On appli-
nursing care insurance, a public holiday cation, the compulsory Nursing Care
(the Day of Prayer and Repentance), Insurance Scheme will take over pen-
was phased out in all the states except sion insurance contributions for nurs-
Saxony. ing staff in the home. The level of these
The provision of compulsory nurs- contributions likewise depends on the
ing care insurance is based on the fol- level of care. In the case of in-patient
lowing rules: prophylactic and rehabili- care, depending upon the level of care,
tative measures aimed at the prevention contributions in kind up to the value of
of the need for nursing care take prefer- s1,023/1,279/1,432 monthly and, in
ence over the services themselves. If a cases of hardship up to s1,688, are paid
need for nursing care exists, care in the out.
home environment (out-patient care) The introduction of the compulsory
takes preference over accommodation Nursing Care Insurance Scheme has
substantially reduced the dependence completely freely negotiated employ-

of people in need of care on social wel- ment contracts, could lead to a compe-
fare services. The choice of services tition for jobs among workers trying to
available has gone up considerably – not under-cut each other, in which workers
least due to a strong increase in the give up their right to important protec-
number of out-patient hospital services. tive regulations in order to get work. In
Due to the foreseeable →demographic the short term, occupational health and
development, if the current quality of safety legislation will inflate the price of
service is to continue, one can count on work; in the long term, however, a
the fact that contribution rates for nurs- prosperity increase can be expected,
ing care insurance will rise in the since there is a greater incentive for
future. investment in human capital.
The legal basis of occupational
REFERENCES: health and safety legislation in the
LAMPERT, H./ALTHAMMER, J. (2004), →social market economy is the Basic Law,
Lehrbuch der Sozialpolitik, 7th edition, Berlin; in particular Articles 1 (protection of
LAMPERT, H./BOSSERT, A. (2004), Die
human dignity), 2 (the fundamental
Wirtschafts- und Sozialordnung der
right to personal freedoms), 3 (the ban
EU. 15th edition, Munich, Vienna.
on discrimination), 12 (free choice of
place and type of work) and 20 and 28
Albrecht Bossert (→social state ruling).
In the course of the ongoing defini-
tion and development of occupational
health and safety legislation, substantial
Occupational health and safety impulses emanate from the system of
labour courts, which is a special juris-
The government, by setting minimum diction for questions of contracts of
standards for working conditions employment and working conditions.
through occupational health and safety The Working Hours Act (Arbeits-
legislation, is trying to realise three zeitgesetz) is supposed to ensure that the
objectives: protecting the worker from worker has enough free time for per-
unjustified demands by the employer; sonal development. Maximum working
protecting the worker from self- hours and work restrictions (graded for
exploitation; and protecting the worker adults, pregnant women and children),
from the actual technical dangers of the marked the beginning of occupational
modern workplace. health and safety legislation in the mid-
Occupational health and safety leg- 19th century.
islation is intended to prevent a situa- In the social market economy, not
tion where under the conditions of all the Working Hours Act directives
→competition typical of a free market will benefit every worker. This is
economy, individual choices are being because of the far-reaching regulations
turned into collective obligations: with- of collective agreements. If, for exam-
out universally binding protective stan- ple, according to section 3 of the
dards, →unemployment, combined with Working Hours Act, the maximum
324 Occupational health and safety
number of working hours per week is becoming more sophisticated, the

48 (8 hours for 6 working days), within mandatory →accident insurance, intro-
most tariff areas the number of working duced as long ago as 1884 as part of
hours per week ranges from 35 to a Bismarck’s social legislation, is playing a
maximum of 40. pivotal role. According to section 1 of
Nevertheless, in the course of the the Social Code VII, its three major
1994 reforms, the Working Hours Act tasks are:
was noticeably rephrased and updated,
meaning that, for example, the special • the prevention of accidents;
protective clauses of the past for female
workers were largely removed for rea- • the restoration of the ability to work
sons of equality. At the same time, peri- after an accident has occurred; and
ods of compensation for extra work and
rest periods were expanded. There is a • compensation for the insured indi-
general tendency to make the Working viduals and/or the survivors in the
Hours Act (including the law governing form of lump sum payments.
trading hours) more flexible.
In the sphere of protection against The mandatory accident insurance
unfair dismissal, the permission of lim- is considered a very successful form of
ited employment contracts created a social security. Through a complex sys-
new situation through the employment tem of contributions, companies are
Promotion Act of 1985. offered definite incentives for preven-
The existence of a material reason tion while also receiving comprehen-
justifying the limitation of the contract sive advice on accident prevention
is now no longer necessary. It became itself. From the perspective of occupa-
clear that, in practice, limited employ- tional health and safety, this strong
ment contracts are regularly used in the emphasis on prevention must be seen as
public service. very positive.
In the private sector, a time limit is The role that occupational health
usually agreed in the event of a peak in and safety plays in a social market econ-
orders, or the employer treats the limit- omy should not just be broadly assessed
ed employment period as an ‘extended after the fashion of ‘deregulation: solu-
trial period’. But since over 90% of all tion or error?’. Rather, the effect of
employment contracts do not have a individual regulations on the labour
time limit, the regulations of the market and on →employment must be
Protection against Unfair Dismissal Act carefully considered.
(revised version 1993) are of great sig- An important point of reference in a
nificance for the majority of workers. detailed evaluation of occupational
They regulate both extraordinary dis- health and safety would be to lay open
missal (without notice) and the legal the conflict of interests between the
terms of notice as a function of seniori- 90% of insiders with jobs and the 10%
ty. of outsiders without jobs. It would be
As the protection against actual inadmissible to simply ignore the inter-
technical dangers in the workplace is ests of either of these two groups.
REFERENCES: you-go’ basis (current disbursement).

BUNDESMINISTERIUM FÜR ARBEIT If, however, the deposited contributions
UND SOZIALORDNUNG (ed) (1997), are not paid out directly but are placed
Übersicht über das Arbeitsrecht, 6th edition,
into interest-bearing investments, it is
Bonn; LAMPERT, H./ENGLBERGER, J./
referred to as working on a fully-fund-
SCHÜLE, U (1991), Ordnungs- und
prozeßpolitische Probleme der Arbeitsmarktpolitik
ed basis. In this way, a fortune gradual-
und -theorie. Berlin; ZERCHE, ly accrues for each pensioner. The
J./SCHÖNIG, W./KLINGENBERGER, D interest yields and the gradually dimin-
(2000), Arbeitsmarktpolitik und -theorie. ishing investment are subsequently
Lehrbuch zu empirischen, institutionellen und used to fund the pensions. In principle,
theoretischen Grundfragen der Arbeitsökonomik, a fully-funded pension scheme works
Munich, Vienna. in the same way as life insurance.
The main problem connected with
Werner Schönig the pay-as-you-go based scheme as
practised in Germany – as in most other
countries – is the availability of funding,
Old-age pensions which is directly dependent on the sec-
tion of the population in gainful
Right from the start of its conceptuali- employment.
sation, one of the fundamental pillars of The reason is simple: pension
the →social market economy was to ensure scheme revenues are based on the con-
that the aged can enjoy their retirement tribution average, multiplied by the
period, adequately provided for and number of employees. Expenditure is
free from poverty. It was equally impor- based on the average pension, multi-
tant that this long-standing old-age plied by the number of pensioners. If
pension should not come across as the number of pensioners rises or the
charity, but be a rightful claim derived number of employees falls (or both), it
from contributions made during the follows that expenditure goes up or rev-
acquisition phase. Therefore, Germany enues go down (or both).
has a so-called contribution-financed However, the pension fund is not
pension system into which each allowed to report a loss; if this happens,
employee deposits a fixed percentage of either the contributions have to be
earned income, and from which pen- raised or the pay-outs lowered. Exactly
sioners draw during retirement in pro- this situation of an increased number of
portion to their contributions. pensioners and a decreased number of
Unfortunately, this looks much employed persons will exist in
more straightforward on paper than it is Germany starting from approximately
in reality. One reason for this is that it the year 2020.
must be decided how the deposited In the year 2000, there were still
contributions are to be used. In about 2.0 employees per pensioner. Just
Germany, the deposited contributions looking at the statistics, in 2020 there
are currently paid directly to the pen- will only be 1.5 employees per pension-
sioners. In other words, this social er and in the year 2040 no more than one
insurance scheme works on a ‘pay-as- employee per pensioner. This is because
326 Old-age pensions
since the mid-1970s, statistically, the to be long-term. But by then there

average woman in Germany gives birth will be, because of the population
to only 1.4 children. The resulting ‘gap’ decrease, only a relatively small num-
in the number of employed persons ber of young people, and therefore
could be closed only through massive the demand for shares, securities and
immigration of at least one million per- real estate will be comparatively
sons a year (→demographic development). small. The pension schemes will find
But Germany is not alone in this it difficult to sell their investments to
predicament. The population trend is the next generation. This means they
similar in nearly all industrialised coun- have to lower their prices, and pen-
tries, although in most cases it is not sion scheme revenues will fall as a
quite so drastic. This is why demands result, which in turn will make the
for the suspension of the pay-as-you-go pensions go down. In this way the
based old-age pension scheme – the fully-funded scheme, too, does not
more widely practised form of retire- escape the consequences of the popu-
ment provision – in favour of the fully- lation decrease, although most ex-
funded schemes are frequently heard. perts believe that the consequences
This, however, comes into conflict with will be less severe.
two problems:
Against this background, nearly all
• During the transitional phase, there industrialised countries are working on
will be no funding for the pensions of pension scheme reforms. In most cases,
one whole generation. This is these reforms result in a mixture of
because if the procedure were pay-as-you-go based and fully-funded
changed over today the deposited schemes, more specifically based on so-
contributions would no longer be called two- or three-column systems.
paid out directly but would first be The first column represents a reduced
invested. However, if the pension version of the pay-as-you-go based
contributions are no longer paid out pension. It is intended to lower the
directly, we have to ask where the pensions paid out of this fund gradual-
funds for today’s pensioners will ly, giving those who are affected ade-
come from. There is no satisfactory quate time for adjustment. The finan-
answer. cial losses suffered by pensioners as a
result of the lower payouts are sup-
• A second problem is that the capital posed to be evened out with the help of
covering procedure is not completely one or two further columns, both of
independent of the population trend. which are constructed on a fully-fund-
The reason: the retirement insurance ed basis.
contributions have to be invested The second column usually entails
somewhere. One would perhaps use compulsory additional pension contri-
them to buy shares and other securi- butions to be invested. In the case of the
ties or even real estate. If one wants to third column, voluntary contributions
‘turn these investments into money’ are made to an investment portfolio
again at retirement age, they will have aimed at the provision of retirement
funds and supported by government tected. Attempts have been made to

subsidies – for instance in the form of bring this about through a basic institu-
tax relief. tional framework (rules) which ensures
In Germany, there will only be two that market processes, wherever possi-
columns – a first column which is still ble, can take place as competitive
relatively large and based on the pay-as- processes.
you-go scheme, and a second column A number of conditions or princi-
which combines voluntary investments ples are of special importance in this
and government subsidies, aimed at regard. Apart from a working price sys-
securing a stable personal income dur- tem and monetary stability (→price level
ing retirement. Taking into account the stability), the guarantee and the protec-
demographic development expected to tion of private property (→property)
start in 2020, one thing is certain: fur- with regard to the means of production,
ther reforms will have to follow. the freedom of contract and the liabili-
ty principle (→individual responsibility),
REFERENCES: open markets are considered the key
DEUTSCHES INSTITUT FÜR (constituent) prerequisite of a healthy
ALTERSVORSORGE (1998), Reform- competitive system.
vorschläge zur gesetzlichen Altersversicherung in
There are two aspects to the open-
Deutschland, Cologne; LAMPERT, H.
ness of a market:
(2001), Lehrbuch der Sozialpolitik, 6th edition,
Berlin.
• There must be unrestricted market
Thomas Apolte entry (no barriers to entry).
• There must also be free market exit

(no barriers to exit).
Open markets: Market entry,
market exit Every potential actor must be given
the opportunity to enter the market as a
In its theoretical conception, the →social new competitor, be it due to spatial
market economy sees competition as the expansion, as a result of product diver-
key to achieving long-term economic sification or a new product launch, or as
and social progress. On the one hand, a newcomer. At the same time, howev-
competition brings about a good mar- er, every established business must be
ket supply of goods and services (eco- able to withdraw unhindered from the
nomic function). On the other hand, market, be it for personal or market-
within the economic process, competi- related reasons. In other words: a
tion allows all actors the greatest possi- healthy competitive system entails that
ble room for manoeuvre and freedom there are no entrance barriers and no
to choose (social and political function). exit barriers for potential or actual mar-
A competitive system, however, ket actors.
which makes the achievement of these This is important because market
goals possible, does not develop auto- barriers of any kind prevent the poten-
matically; it has to be created and pro- tial newcomer from having a positive
328 Open markets: Market entry, market exit
impact on market efficiency, and also become stagnant). Key variables that
because they counteract the stimulus to can make market entry strategically
try harder, which arises from the latent more difficult are inflated capacities,
threat of being pushed out of the mar- price-cutting, product differentiation
ket. and vertical integration. All of these fac-
Free market entry and exit exercise a tors make the price competition more
welcome competitive pressure on prices difficult for a newcomer.
and costs and thus also on company But equally relevant for a healthy
→profits. This in turn forces the produc- competitive market are market exit bar-
er to adopt economically rational behav- riers. In stagnating or shrinking mar-
iour, which aims at the most efficient kets, which are characterised by the
use of economic resources (optimal fac- long-term decrease of demand, the eco-
tor allocation) and the speedy adjust- nomically necessary removal of excess
ment of products and production capac- capacities is delayed. This means that a
ity. The producer must also react to brisk adjustment of the supply to
external economic data (adjustment declining demand is prevented.
flexibility) and be prepared to introduce Imbalances of →supply and demand
innovative processes, products, funding remain. Resources remain tied up in
methods, distribution techniques and areas where they are no longer required
marketing concepts (technical pro- to supply the market.
gress). In the long run, the actual goal of An example of structural withdraw-
the entire production and competition al barriers would be irreversible costs in
process – which is to offer optimal serv- the case of permanent, specialised pro-
ice to the last link in the chain, i.e. the duction plants (sunk costs), contractual
consumer – works better. penalties when production is ceased
In reality, however, competition is without alternative sales opportunities,
frequently hampered by market barri- or the impossibility of modification of
ers. Of special importance here are the plant for the production of other
market entry barriers. Generally, these goods. Strategic exit barriers include
are factors that make market entry more concern for the corporate image, sec-
difficult for newcomers or exclude ondary opportunities to market the
them altogether, resulting in a lack of products or access to the financial mar-
competitive pressure and the possible kets.
perpetuation of existing inefficiencies. Apart from market barriers that
A distinction must be made here result from direct decisions by the eco-
between structural and strategic barri- nomic agents, institutional market bar-
ers. riers must also be considered. These are
Examples of structural entry barri- based on national laws, public decisions
ers are factors such as problems regard- or historical circumstances. Instit-
ing the size of the business, product dif- utional market barriers of a structural
ferentiation, absolute cost disadvan- kind related to market entry include the
tages, development costs, irreversibility legislative organisation of commercial
or unfavourable times in the economy and corporate law and the patent and
(when, for example, demand has licensing system, as well as merger con-
Parastatals 329
trol; while in relation to market exit, Parastatals

social and political regulations such as
government assistance schemes in the There seems to be little doubt that the
event of insolvencies (financial difficul- production of marketable goods and
ties and bankruptcy) need to be men- services for private use or consumption
tioned. – such as breakfast rolls and trips in a
Examples of strategically aligned taxi – ought to belong to the area of
institutional market barriers are regula- competence of private →enterprises. The
tions, merger prohibitions and trade goods are called private goods because a
barriers (market entry) as well as →sub- market exists for them where the cus-
sidies or policies of moral persuasion tomers are prepared to pay at least a
and manipulation by trade unions, break-even price. This is the case
politicians and government institutions, because the buyers are able to enjoy the
such as in the case of threatened dis- exclusive use or consumption by them-
missals of workers (→interest groups, lob- selves (exclusion principle). But there is
bies). also a service sector offering goods
Contrary to the market barriers that which are useful to the public and from
are the consequences of the decision- which the exclusion of others is not at
making of private economic agents, all, or only partly, possible. This applies
institutional market barriers can be in cases such as national defence and
instrumental in the shaping of econom- street lighting.
ic structure, and concomitantly that of The market fails to deal successfully
the social market economy. Institu- with these public goods because the
tional market barriers can be imposed user or consumer is not voluntarily pre-
by the political decision-makers, e.g. for pared to pay at least a break-even price
social and political reasons, and they for their use. It is true that such servic-
can also be abolished again. The chal- es are desirable to the citizens who con-
lenge is to determine whether in a cer- sider them important. However, to
tain area institutional market barriers motivate them to contribute to the costs
are actually appropriate or not. of their production proves problemati-
cal.
REFERENCES: People hardly see the need to pay a
BAIN, J. S. (1956), Barriers to New voluntary contribution for services if
Competition, Cambridge, Mass.; KRUSE, J. they can fairly assume that they are pro-
(1988), Irreversibility and Natural Market
duced anyway and that they cannot be
Entrance Barriers, Jahrbücher für National-
excluded from the benefit of their use
ökonomie und Statistik, 204, pp. 508-517;
TUCHTFELDT, E./FRITZ- AßMUS, D.
or consumption. Therefore, the agree-
(1992), Über den Marktaustritt: Gründe ment on the type and extent of such
und Hemmungen, Ordo – Jahrbuch für die primarily public expenses takes place in
Ordnung von Wirtschaft und Gesellschaft, 43, pp. a political process outside the market,
237-253. and the production is usually funded
via the government budget in the form
Dieter Fritz-Aßmus of taxation through compulsory contri-
butions (→tax policy, →public revenue).
330 Parastatals
Apart from inherently public institutions can be identified as paras-

responsibilities, numerous specialised, tatals, such as development (aid) banks
defined tasks of public interest are per- and possibly even the →European
manently taken care of by independent Union, since they carry out their gov-
institutions and budgets. They stand ernment assignments autonomously
side by side with the budgets of the and on the basis of their own financial
regional governmental authorities of resources and budgets. Besides these
the →Federal Republic, federal states and parastatals – more loosely defined – the
municipalities, and are therefore called so-called subsidiary parastatals and
parastatals. group parastatals also belong to this cat-
Parastatals are quasi-governmental egory. They differ from the abovemen-
institutions (with financial autonomy tioned parastatals in the following ways:
and their own organisational structure
and administration) which take care of • Social security parastatals are govern-
community-related tasks. This puts ment institutions and serve the public
them into a so-called third sector interest. They have their own budgets
between regional governmental author- and organisational autonomy, al-
ities – such as the representatives of ter- though they frequently receive funds
ritorial and social interests – and the from other public budgets (alimony).
market as the coordinating mechanism They are so-called special assets (e.g.
for private individual economic inter- the assets of the Federal Railway,
ests. Accordingly, parastatals are also →Redemption Fund for Inherited
called intermediate finance authorities. Liabilities, European Recovery
Typical parastatals in the narrower Programme (ERP) special assets, the
sense of the word are the (mandatory) German Unity Fund, Equalisation of
→unemployment, →health, →nursing, Burdens Fund) and government
→pension and →accident insurance (social) foundations (research foundations,
schemes, as well as the professional rep- cultural foundations). It is obvious,
resentatives for commerce, the trades, however, that in the →public enterpris-
industry and agriculture (professional es (as previously in the case of the Post
parastatals). But the churches and other Office and the Railways) as well as
state-recognised religious communities the public institutions (e.g. the public
also belong to this category. The fund- broadcasting and television compa-
ing for the services that these institu- nies), the typical features of a sub-
tions offer is based on state-guaranteed sidiary parastatal have become
entitlements, such as compulsory increasingly obsolete, particularly
memberships (social security, →cham- regarding government control of
bers) or additional tax procedures for the services and prices, as well as govern-
collection of contributions. This type of ment funding. Services which used to
financial concession is usually justified be government funded are now treat-
by the outstanding social benefits (pub- ed as businesses which have to sur-
lic interest) which result from the activ- vive the →competition. In this way, the
ities of such organisations. necessary foundation first for the
In addition, some international legal and then gradually also the
Patent system 331
material →privatisation of public importance – such as when frequent

enterprises (examples: German shifts are made in the pension and
Telecom, the German Post Office, health insurance sector, the enormous
the German Railway) is being laid. monetary currents of these funds and
services are changed repeatedly.
• Parastatals also include separate asso- In addition, such ‘third sector’ insti-
ciations which primarily pursue tutions can also be interpreted as a con-
group-related aims but whose servic- stant questioning of government com-
es are equally highly beneficial to the petence: not only are they evading the
public interest. Examples are charity general validity of the subsidiarity prin-
groups, non-profit organisations and ciple (→fiscal federalism), they can in
federations that partly offer mar- principle also be interpreted as a politi-
ketable services (nursing, school edu- cal challenge of the respective agencies
cation) and partly collective services to become more competitive. The
(→interest groups, lobbies such as trade dynamics of the political, legal, func-
unions, employers’ associations and tional and economic processes make it
→political parties) which are useful to advisable to carry out checks on specif-
society, but also take on social tasks ic assignments at regular intervals – if
(e.g. care of the aged, social security necessary followed by a restructuring of
assistance for the homeless). Such the institution in question – so that
institutions are financially assisted both the relevant business and public
through tax deductions and public needs can be adequately fulfilled.
subsidies.
REFERENCES:
Due to the great variety of these BURMEISTER, K. (1997), Außerbudgetäre

institutions and because of their differ- Aktivitäten des Bundes – Eine Analyse der
Nebenhaushalte des Bundes unter besonderer
ing institutional character, it is impossi-
Berücksichtigung der finanzhistorischen
ble to define parastatals with perfect
Entwicklung, Frankfurt/ M.; GELBHAAR, S.
accuracy. There is also a lack of easily (1998), Ökonomik der Parafiski – Stand
accessible statistical data on many paras- und Perspektiven, in: Wirtschafts-
tatals. This makes assessments and eval- wissenschaftliches Studium, 11, pp. 570ff.;
uations of government activities gener- TIEPELMANN, K./BEEK, G. van der (ed)
ally more difficult and also hampers (1992), Theorie der Parafiski, Berlin, New
international comparisons of the rele- York.
vant expenditures.
The shift of government appoint- Dietrich Dickertmann
ments to parastatal institutions con- Viktor Wilpert Piel
sciously or unconsciously, reduces the
transparency of their financial effects.
But still more serious is the fact that Patent system
democratic control over public func-
tions, revenues and expenditures is The basic ideas on patenting developed
diminished. In certain cases this can be during the age of industrialisation and
of quite considerable macroeconomic when freedom of trade was first intro-
332 Patent system
duced during the late 18th and early force since 1981. It particularly regu-
19th centuries. lates the task of the patent office to
The core consideration in the examine, on request, the material
course of the emergence of legal protec- patentability of a technical invention, to
tion for commerce was to offer legally issue the patent in return for a fee (peri-
guaranteed protection from imitation od of protection up to 20 years), and to
or abuse (protective function) on the publish the patent specifications with
one hand, while creating incentives for the accompanying disclosure of the
technical developments and the emer- innovations.
gence of new knowledge (information Only technical inventions that are
function) on the other. This means that genuinely new and commercially viable
by way of compensation, the inventor are considered patentable, such as a
as the creator of new technology must product, device, procedure, application
be given the exclusive, albeit only tem- or form of organisation. Not
porary, right to use, manufacture com- patentable, however, are discoveries,
mercially, offer and license the patented scientific theories and mathematical
article. This ensures that the new methods, ‘aesthetic form creations’,
knowledge is completely disclosed and plans, rules or the reproduction of
made accessible to everybody. information.
At the same time, it is expected to According to German and
become easily incorporated into the European law at least, plant and animal
economically favourable process of species cannot be patented. Legally and
research and development. A patent is ethically extremely controversial is the
therefore an exclusive but temporary handling of genetically engineered ani-
monopoly which the inventor (or legal mals, for which some countries (such as
successors) is granted by the state. It the United States) issue patents.
permits the commercial use of the Patenting, albeit not in unrestricted
invention on condition that it be dis- form, is seen as an important prerequi-
closed and that the technical innovation site for the technical progress and eco-
be made generally accessible. nomic success of a country. Since it has
In Germany, patents are distributed a protective function and because of the
by the German Patent and Trade Mark way it deals with information, patenting
Office, based in Munich. This is the naturally stimulates innovation. It
supreme federal authority in its field therefore also constitutes a significant
and it reports to the Federal Justice element of the government’s second-
Ministry. The European Patent Office, line technology policy.
also in Munich, has been responsible It has been argued that patents make
for the distribution and administration knowledge more transparent, promote
of European patents since 1978. creativity, prevent simultaneous and
Legal decisions in the sphere of faulty developments, and reveal techni-
patent law are based on laws and agree- cal gaps to competitors, other industries
ments: the first universal German and other countries. The temporary
Patent Act was created in 1877; the ver- award of exclusive rights of disposal can
sion which is valid today has been in be a strong incentive for individuals and
enterprises to focus on inventions and allowing some scope for imitative uses
innovations which favour competition. of the patented technology in the inter-
While these motivational effects est of competition and technical devel-
have definitely been acknowledged opment.
from the point of view of innovation
and technology policy, in the area of REFERENCES:
competition theory and policy it is par- OPPENLÄNDER, K. H. (ed) (1984),

ticularly the restrictive effects which are Patentwesen, technischer Fortschritt und
Wettbewerb. Berlin; FAUST, K. (1999), Das
being considered and investigated. And
Patentsystem auf dem Prüfstand, Ifo-
here it is not the delayed access to
Schnelldienst, 27, pp. 3-10; DEUTSCHES
knowledge that attracts most of the crit- PATENT- UND MARKENAMT
icism, but rather the delay in the (www.dpma.de)
process of dissemination within the
sphere of innovation due to market Dieter Fritz-Aßmus
entry barriers (→open markets).
It has been said that patenting
knowingly hampers →competition and
promotes monopolistic market struc- Pension insurance (additional
tures by excluding potential competi- services)
tors, especially small and medium-sized
enterprises, from the new technology. The ‘additional services’ of the pension
There is also said to be the danger that insurance scheme are not by any means
by strategically patenting its own inno- subordinate. Rather, they are the man-
vations and by buying up other patents, ner in which the compulsory pension
an enterprise may seek to dominate insurance scheme is making key servic-
markets permanently. In such markets, es which form part of the social securi-
technical progress tends to slow down ty system, available to the public (→old-
and brings disadvantages for the econo- age pension).
my. In detail, the additional services of
It is up to the economic policy-mak- the compulsory pension insurance
ers to resolve clearly conflicting aims by scheme represent interventions for the
paying proper attention to the underly- preservation and rehabilitation of earn-
ing problems of patenting: on the one ing capacity and pensions due to
hand, the creation of new knowledge reduced earning capacity or surviving
must be stimulated while at the same dependents’ pensions.
time illegitimate imitations must be Interventions for the preservation
prevented; on the other hand, it is their and rehabilitation of earning capacity
task to stimulate competition and the (ss. 9-32 Social Legislation Code – VI)
spread of the new knowledge by urging take preference over pension pay-outs.
that new products and procedures Expressed differently, pensions are
should be copied. paid out only if effective rehabilitation
The ideal form of patenting, there- is not possible at all or only at a later
fore, has to offer sufficient incentives time. Rehabilitation services cover
for innovative activities while also medical and employment interven-
334 Policy consulting
tions. For this purpose, the agents of the (2004), Lehrbuch der Sozialpolitik, 7th edition,
pension insurance schemes have devel- Berlin; VERBAND DER VERSICHER-
oped an extensive network of spe- UNGSTRÄGER (1999), Rentenversicherung
in Zeitreihen. Eine Information ihrer
cialised institutions.
Rentenversicherung, Frankfurt/M.
Apart from a threatened or impaired
earning capacity, entitlement to rehabil- Werner Schönig
itation services is conditional upon a
minimum 15-year membership in the
insurance scheme. While undergoing
rehabilitation, the insured members Policy consulting
receive bridging payments worth 80%
of their last salaries. The social market economy is not a
Additional pension services (ss. 33- clearly defined social utopia; rather, it is
105 Social Legislation Code – VI), i.e. an open concept that can be adapted to
pensions which do not take the form of changing conditions. This advantage,
old-age pensions due to own contribu- however, is also a danger: there is a risk
tions, can be based on a variety of dif- that policy implementation is biased,
ferent entitlements. Closest to the old- sooner or later eroding the basic con-
age pensions are the surviving depend- cept (→social market economy: political
ents’ pensions, which are paid out to implementation).
surviving spouses and orphans. The There is a continual need to coun-
crux in this case is that at the time of terbalance conflicting basic principles.
death, the deceased was entitled to a In terms of economic policy, the social
pension on which the claims of the market economy is an on-going task.
dependants are based. This throws up the question: where
In contrast to this, pensions due to should one turn for the sort of scientif-
impaired earning capacity, or pensions ic policy consulting likely to make eco-
which replace or supplement lost nomic policy more rational?
income, are paid out to the insured per- In order to be able to answer this
sonally. Disability pensions that were question one needs an understanding of
conditional upon the ability to practise what policy consulting is, an insight
learned vocational skill were phased out into the political process, and also a
by the 1999 Pension Reform Act. theory that clarifies the possibilities and
Especially affected by this are employ- limitations of steering politically an
ees running a greater-than-normal risk economy.
to be incapacitated for work (e.g. bak- In all three of these areas a mecha-
ers, nursing staff) and who would thus nistic, short-sighted approach must be
be forced to take out private insurance avoided: policy recommendations do
at contingency rates. not follow scientific insights ‘automati-
cally’; policies cannot not be mechani-
REFERENCES:
cally implemented, and economic
BUNDESMINISTERIUM FÜR ARBEIT
UND SOZIALORDNUNG (ed) (2000), cause-and-effect connections cannot be
Übersicht über das Sozialrecht, 6th edition, represented as a ‘machine model’
Bonn; LAMPERT, H./ALTHAMMER, J. (→market mechanism).
Possibilities and limitations of what the relationship between the

objective policy consulting intended final result and unintentional
If economics wants to get involved in side effects on other objectives will be.
policy consulting, it needs value judg- Thus it is clear that scientific recom-
ments. Without value judgments, sci- mendations have to be based on a num-
entific theories cannot yield recom- ber of value judgments, even if the fun-
mendations. damental objectives come from outside.
It is true that theories can explain In either case, if policy consulting wants
how economic policy instruments to be taken seriously it has to strive to
affect specific objectives, but that does disclose the value judgments which
not mean that they automatically indi- have been used.
cate which objectives should be pur- On the one hand, the need for addi-
sued. The objective that scientific poli- tional value judgments explains why
cy consulting ought to be ‘value-free’ economic policy recommendations by
refers only to the objectivity of the the- different experts can differ so greatly
ories and not to the view that there from each other. On the other hand, it
ought to be no value judgments what- means that science is by no means
soever. obliged to accept objectives ‘from out-
But which value judgments should side’ as the final answer. It is also possi-
an economic consultant choose? An ble to reject an objective by referring to
answer that is frequently given is the other value judgments.
instrumentalist one. Here, the value In this context it is important to
judgment and political objectives come know exactly what ‘from outside’ is
‘from outside’ and science looks only supposed to mean. Does an objective
for suitable (effective and economical) really reflect the ideas of all economic
instruments. agents or is it derived from a political
At first sight this solution seems ele- process in which individual interests are
gant, but it must not be overlooked that over-represented?
the ‘mechanical’ search for instruments
in no way guarantees that the recom- Consulting for politicians and
mendations are value-free, because policy consulting
what is an objective and what is an The question where the value judg-
instrument, is initially not absolutely ments and objectives of an economic
obvious. This means that instruments policy can come from takes us to the
also have a value of their own (objec- target group of policy consulting. For
tive-like) and that objectives can appear the sake of correctness one ought to dif-
like instruments with regard to superi- ferentiate between policy consulting as
or goals. But instruments can also have a citizens’ advisory service for all who
side effects on other objectives which are affected by economic policy, and
are not being pursued (→conflicting aims policy consulting as consulting for
in economic policy). politicians. This distinction is frequent-
Without a value judgment it is ly blurred, and it tends to be considered
impossible to decide which objective is sufficient to enlighten the political deci-
more deserving (goal hierarchy) or sion-makers.
336 Policy consulting
This position tacitly assumes that in such a manner, then any attempt to
politicians act exclusively in the interest change them by gathering information
of their citizens. A politician is there- on better policies is senseless: advising
fore imagined as a ‘benevolent dictator’ politicians is impossible (the determi-
who mechanically converts the well- nacy paradox).
meant advice received from the policy An argument against this is the
adviser into good policies, and who has empirical observation that there have
the necessary power to do so. But to indeed been comprehensive economic
consider the political process simply as policy reforms that were implemented
‘policy mechanism’ would be wrong. on the recommendation of scientific
Fortunately, in a democracy, politi- advisers.
cians are not dictators, which also In theory, the bulk of information
means that in the process of imple- that is assumed in the model speaks
menting recommendations they are against the impossibility of advising
bound to meet with resistance. Even if politicians. In the long run, the politi-
an economic policy measure has bene- cian must be just as well informed as
fits for all, →interest groups who see the benevolent dictator in the model.
themselves on the losing side can The information required concerns the
undermine its implementation. effect of political measures, political
Politicians are also not completely opposition and – which is not natural
deaf to the promotion of individual by any means – personal interests. The
interests. This is because, in the short model also assumes that these self-
term, the political support of well- interests are permanent and stable.
organised interest groups is often more There is thus no chance that intentions
important to politicians than the satis- change and that, for example, the
faction of the disorganised general pub- opportunist turns into a statesman or a
lic and their interests. This shows that passionate reformer.
the intentions of politicians, too, are not Political opposition is likewise
endlessly benevolent or exclusively assumed to be stable due to the fact that
aimed at the common good. This self- policy consulting is exclusively under-
interest of politicians has been given stood as advising politicians. If advising
special emphasis in economic policy citizens comes into the picture, these
theory (public choice). boundaries may change.
However, this way of thinking In conclusion, it can be said that
would be accompanied by another advising politicians may be possible, but
mechanistic error: the assumption that that it is not enough. Policy consulting
politicians are strictly self-interested, – in the form of advice for citizens – is
combined with political competition an important project for scientists.
modelled as a market mechanism, Only in this way can political opposi-
results in political acting being tion to a rational economic policy –
absolutely determined. The policies are which the model of the benevolent dic-
completely governed by politicians’ tator overlooks but which is a perma-
interests and by political opposition. nent feature in the pessimistic model of
If, however, policies are determined advising politicians – be reduced.
Possibilities and limitations of icy within the concept of the social mar-
political control ket economy.
Many of the mistakes described so far
are based on the mechanistic misinter- REFERENCES:
pretation of the economy. When rec- STREIT, M. (2000), Theorie der

ommendations are value-free, one of Wirtschaftspolitik, 5th edition, Düsseldorf;
WEGNER, G. (1996), Wirtschaftspolitik zwis-
the problems is how to balance the
chen Selbst – und Fremdsteuerung – ein neuer
intended effects against the uninten-
Ansatz, Baden-Baden; OKRUCH, S.
tional side-effects. The necessary evalu- (2002), Das Elend der deutschen
ation of the side-effects is left out of the Wirtschaftspolitik – gibt es einen ‘evolu-
picture precisely when total controlla- torischen’ Ausweg?, in: Ötsch, W./Panther,
bility of the economy is assumed. Side- S. (ed), Ökonomik und Sozialwissenschaft,
effects are then faded out. In terms of Marburg, pp. 301-325; — (2004),
advising politicians, it is clear, for exam- Evolutorische Wirtschaftspolitik: Von der
ple, that the benevolent dictator also has Positiven zur Normativen Theorie, in:
to assume controllability of the eco- Herrmann-Pillath, C. /Lehmann- Waffen-
nomic process. Only under this schmidt, M. (ed), Handbuch der Evolutorischen
assumption are the ‘well meant’ eco- Ökonomik, Heidelberg.
nomic policies successful in practice or
Stefan Okruch
‘well done’.
In each case, the underlying concept
of economic cause-and-effect interde-
pendence is a ‘machine model’. If the Political parties
mode of operation of the ‘economic
machine’ is known, one automatically In a pluralist society there are a large
has the necessary information on how number of groups, institutions and
to manipulate the different settings of →interest groups putting pressure on the
the economic policy. government’s economic policy. The
A fundamental objection to this political parties play a particularly
view is the fact that the different ele- important role in this. Modern democ-
ments of an economic system are sim- racies are therefore also referred to as
ply not the cogs of a machine which run ‘party states’.
evenly and smoothly all the time, but Parties are organised associations of
flexible and creative actors who can persons who have the same political,
evade political control. This means that social, economic and philosophical out-
the same political intervention can have look and who want to influence the
quite different effects. political process. They are even consti-
If, however, the effect cannot be tutionally acknowledged in the Basic
stated with complete certainty and pre- Law of the Federal Republic of Ger-
cision but only an approximate range of many (Article 21).
possible effects is known, then the Political parties are supposed to par-
attempt at control must be scaled down. ticipate ‘in the formation of the political
This is precisely associated with the pri- will of the people’, and they have been
ority accorded to →institutional order pol- assigned the ‘rank of a constitutional
338 Political parties
institution’ (Federal Constitutional of the opposition to point out these

Court 2.1/73). A pluralist society needs conflicting aims in political and eco-
a pluralist party system that takes polit- nomic policy, to clarify situations and to
ical →competition between the parties for criticise government positions that are
granted. harmful to the common good (→con-
Lastly, parties want to win a parlia- flicting aims in economic policy).
mentary majority in order to be able to Political parties do not operate only
exercise their political power. They through parliament. What they can
defend their goals in parliament and in achieve before and outside parliamen-
other public bodies in order to have the tary sessions is of equal importance.
opportunity to see their ideas practical- There, they offer citizens the opportu-
ly implemented when they represent nity of participation in the formation of
the government, or at least a part of it. their political will.
The government can crucially influ- ‘They unite voters into political
ence economic policy through laws, action groups and thus become the
regulations and programmes and by mouthpiece of people who have come
exerting direct pressure on other actors. of age and who want to be heard ...
It can make a decisive contribution to Without their mediating role, the peo-
the preservation of existing liberties and ple today ... would not be able to exert
the unlocking of potential liberties, any influence on the political process
which a successful economy needs. and thus to express themselves in the
At the same time, the government political arena.’ (Hesselberger, p. 176).
and the parties behind it influence the Political parties are often anxious to
administration, the official media and influence public opinion, win new sup-
the public sector of the economy porters, mobilise their constituencies
through a well-conceived human and represent and reinforce their posi-
resources policy. tion through suitable candidates in
The minority parties represent the election campaigns.
parliamentary opposition. They gener- Parties are therefore not only sup-
ally cannot do much more than moni- posed to organise but also to compre-
tor and criticise government activities. hensively interpret reality. It is true that
Regarding economic policy, however, outsiders are continually trying to
minority parties play an exceptionally manipulate political parties and that
important role because economic they do, indeed, represent individual
processes affect every single person so interests. However, in order to organise
profoundly. Moreover, economic policy society as a whole, to represent individ-
frequently has conflicting aims. A goal – ual interests will not suffice. It also does
such as the reduction of →unemployment not suffice to win a majority among the
– can be opposed to another – e.g. the people and in parliament. This is why
protection of →price level stability. political parties have to work out com-
And lastly, political and economic prehensive concepts for society and the
policy is nearly always connected with economy with the common good in
the redistribution of funds, legal posi- mind, and in addition to develop
tions and status. Above all, it is the task instruments with which to turn these
social programmes into reality. This is CDU, but without ever officially
the fundamental difference between adopting the term →social market econo-
political parties and trade associations, my. In 1959 it agreed on the Godesberg
→enterprises or trade unions. programme, which represents a break
In the course of the competitive with socialist economic concepts. Even
process between the parties, many dif- the Bündnis 90/Die Grünen (Alliance
ferent programmes have been and are ’90/The Greens) is showing signs of
being presented. In today’s party spec- wanting to follow the example of the
trum they are mainly liberal, socialist social market economy. These examples
and conservative. However, the mani- show that the economic policy concepts
festo of a party is not only laid down in of the parties can, and actually have to,
the programme of a party but also in its change as they are searching for
actions and direct statements. answers to economic and political chal-
The history of the Federal Republic lenges.
of Germany shows that in terms of the The convergence of the economic
parties’ economic policy concepts, a policy programmes does not mean that
convergence has taken place between all parties represent and promote the
them. The conceptual differences same economic policy. It means, rather,
(polarisation) between the parties have that a number of different economic
decreased over the years, thus making policy concepts – such as political pro-
the formation of coalitions easier today. grammes – are based on demand or
With the exception of the Party of supply orientation, or on →monetarism.
Democratic Socialism (PDS) – now Also, there are very different concepts
part of The Left. party – all the parties of the role of the government in the
represented in the Bundestag (parlia- economy, the extent of the necessary
ment) today subscribe to the concept of bureaucracy and its costs, the signifi-
a market economy. cance of large corporations and the
When after the Second World War middle classes for the economy and
the Christian Democratic Union society, over the extent of the develop-
(CDU) initially presented an economic ment of the →social/welfare state. In the
concept containing various socialist ele- detailed answers to these questions and
ments (the Ahlen Programme, 1947), it the way they are put into practice
did not take long before the concept of through political processes, the conver-
the social market economy became gence of economic policy concepts
generally accepted under the influence soon comes to a halt.
of Ludwig →Erhard (the Düsseldorf
Principles, 1949). REFERENCES:
With the unparalleled success of his MEIER, C (1999), Die parlamentarische

economic policy, the Free Democratic Demokratie, Munich, Vienna; HESSEL-
BERGER, D (1988), Das Grundgesetz,
Party (FDP) soon followed suit. In
Neuwied; STOLTENBERG, G. (1999),
reaction to its parliamentary election
Das Konzept der Sozialen Marktwirtschaft,
defeats during the 1950s and 1960s, the Saint Augustin.
Social Democratic Party (SPD) aligned
itself to the successful concept of the Horst-Dieter Westerhoff
340 Poverty
Poverty Types of poverty

The modern scientific and political dis-
Origins of evaluation cussion on poverty focuses on the situ-
Poverty is a constant component of the ation in many developing countries and
history of mankind. There is an the lack of necessary food in those
unequal distribution of goods, money, countries. In part, the physical subsis-
rights, talents, knowledge, etc. in every tence level and the survival of humans
society. If this inequality leads to a crisis are not secured. This level of absolute
situation, which is not limited in dura- poverty is attained, according to the
tion, it becomes rather the determining definition of the World Bank, if those
situation of the persons concerned – concerned have less than a dollar a day
and then one speaks of poverty. to live on. This kind of evaluation is rel-
The evaluation of poverty has never atively easy to apply, statistically speak-
been clear in European culture. On the ing, if income data are to some extent
one hand, the old tradition of stigmati- available for the country concerned.
sation where the poor are condemned The poverty discussion in industri-
continues; on the other hand, the New alised countries – in the former com-
Testament’s demand to care for the munist countries as well as the emerg-
poor (caritas) is viewed as a Christian ing markets – is, however, quite differ-
virtue, with some freely choosing ent. It concerns much more than the
poverty as a way of life (mendicant material survival of the poor; more
monastic order). accurately, it concerns the capability of
Taking care of the poor was tradi- the poor to share in a general social life
tionally a task of the church, which was – or the exclusion from it. Thus, pover-
increasingly undertaken by the poor- ty is much more than differing degrees
houses and charities, thus making the of material equipment, resources and
transition to the jurisdiction of the means of subsistence. Beyond this,
municipalities. there are models that cite the lack of
With the beginning of industrialisa- social contact, human affection, educa-
tion, poverty was viewed less as an indi- tion, dependence, etc. as poverty. The
vidual fate and more as a consequence term poverty must therefore become
of economic and social processes. Thus, applicable to more complex situations;
towards the end of the 19th century, accordingly, it is that much more diffi-
public facilities took over the responsi- cult to measure.
bility – ‘social security’ – to secure and The Council of Ministers of the
reduce poverty risks (illness, accident, →European Union tried to elucidate a
unemployment). Today’s struggle with definition of relative poverty, a defini-
poverty is justified along the lines that it tion according to which Germany also
is an attack on human dignity, a handi- orients itself.
cap to self-development possibilities of The minimum, therefore, refers to
those concerned, and has economic and individuals, families or groups of per-
political consequences, such as crimi- sons who have so little (material, cul-
nality, migration and unemployed tural and social) means that they are
growth reserves. excluded from the way of life consid-
Poverty 341
ered a minimum standard in the mem- This concept has met with diverse
ber state in which they live. criticism – criticism applicable to com-
This complex understanding of parable poverty evaluations. A certain
poverty orients itself along traditional amount of resources available to an
conceptions. In the Middle Ages, the individual do not stem from the mar-
beggars and those without taxable ket: self-work, do it yourself, domestic
wealth were not the only persons to be economic activities, hypothetical rent
considered poor. The term ‘poor’ also for self-occupied lodging, income from
applied to persons who, unlike the illegal employment, smuggling, etc.
‘strong ones’, had neither physical These resources are not classifiable as
strength nor social power, who were market income.
disadvantaged in legal respects and who Furthermore, state transfers must
were unable to defend themselves with be understood as a resource supply not
a weapon. This definition applied to occurring through the market. These
older, sick or disabled persons, widows, include free education, subsidies for
orphans and prisoners, as well foreign- public libraries, swimming pools and
ers and pilgrims. transport, rentals, nationally promoted
social services, crèches, etc. It is esti-
The problem of measurement mated that the monetary value of these
In science, there are several ways of state benefits amount to approximately
measuring poverty, whereby the stan- a quarter of the official available average
dard operationalisations derive data German income.
from the earned market income. Thus, This concept, therefore, does not
they focus purely on economic cate- measure poverty; rather, it measures
gories (income poverty). This is cor- imbalances among the distribution of
rect: everyone must have a minimum income. One could, according to this
income in order to live a life in dignity method, conclude that poverty is less
and to participate in social life. The predominant in North Korea or Cuba
question concerns itself with the than it is in Germany, even though
resources necessary to live. some people in those countries are
Deviation from the average income starving. The relative uniform distribu-
is frequently used as the most impor- tion of all →incomes is the cause of this.
tant measurement tool for poverty in The temporal comparison of this meas-
connection with EU poverty pro- urement method is also problematical
grammes. According to this approach, because the same proportional increase
those earning less than 50% of the aver- of all incomes does not change anything
age income of a national economy to in the degree of the poverty. Thus, by
cover living costs are considered to be definition, poverty cannot be overcome
poor. Other limitations are conceivable as long as humans earn different
and are being used. According to incomes.
Germany’s first 2000 Poverty and It is paradoxical that when one takes
Wealth Report, between 5.7% and away from the rich, poverty decreases –
19.6% of the German population are to without having given anything to the
be identified as poor. poor. The average is reduced, the
342 Poverty
poverty line is lowered, and thus pover- nomically speaking. Otherwise, the
ty is reduced. level of social welfare assistance and the
A further criticism concerns the subsistence level would be wrongly
economic and sociological reasons established. Social welfare assistance
behind this measurement. There is no can therefore not be an indicator for
scientific reason to use the average poverty; rather, it measures that poverty
income of a population as a reference which is prevented through assistance.
variable for comparisons. A further Furthermore, social welfare assis-
question addresses the concrete popula- tance as a criterion for poverty leads to
tion of comparison. Strictly speaking, results that do not correspond to its
the comparisons should be made only objectives: therefore, countries with an
in a social context. Likewise, it cannot extensive social assistance system have
be substantiated why those who earn many poor, while countries without a
less than 50% of the average income are social security system have no poor.
considered poor. Following this train of thought, since
Furthermore, the computation of the expansion of aid and the increase in
the statistical variables reveals the prob- those able to apply would increase
lem that the households receiving poverty, the most effective way to battle
income are of different sizes. The con- poverty would thus be to reduce or
ception prevails that with each further abolish the social assistance system!
household member with the same Social welfare assistance statistics
lifestyle, a smaller income is needed are also less suitable as a means to meas-
because different goods are used jointly. ure poverty because they evade eco-
In order to generate comparability in nomic-political and socio-political
this case, the income amounts are trans- influence. Take, for example, immigra-
lated into equivalent incomes. Depend- tion to Germany. This segment of social
ing on how these are applied, the mag- assistance has taken on such a dimen-
nitude of ‘measurable’ poverty can be sion that it determines levels and direc-
manipulated. tions. However, this means that
As a further important indicator of increasing numbers of recipients of
poverty, social welfare assistance social assistance do not equal the pau-
(→basic social security) is considered. perisation of the population in our
Assistance is granted when personal country. Rather, the German concern
financial means and other social securi- for immigrants is being expressed.
ty measures have run out. Germans and There is a group of people who live
foreign nationals receive social assis- on less than the subsistence level in
tance if they meet the criteria. accordance with the social welfare assis-
The minimum subsistence level is tance and who do not exhaust their
to be guaranteed through social assis- entitlements as outlined in the social
tance, in order to give the recipient the welfare assistance system. One can only
opportunity to live with dignity. speculate as to the reasons for this ‘hid-
Exercising the option to claim social den poverty’: shame, ignorance, embar-
assistance, however, leads to the impos- rassment at asserting entitlements con-
sibility that poverty can occur – eco- cerning their families, embarrassment
at the examination of their personal sit- gered. The public, therefore, is sensi-
uation, e.g. because of net assets or tised towards the subject of poverty and
waiting for social security entitlements thus ready to believe that poverty in our
or other services. society constantly rises. Phrases such as
The term ‘hidden poverty’ is mis- ‘dismantling the welfare state’, ‘new
leading because, according to the defi- poverty’, ‘two-thirds society’, and
nition of social assistance, this circle of ‘exclusion’ are falling on fertile soil.
people is actually the poor: the income Some scientists, journalists, politicians
of these persons lies below the mini- and also church representatives operate
mum subsistence level. However, there their ‘business’ with this subject. This
are only a few empirical investigations emotion-packed subject is suited more
on this subject. than any other to convincingly assign-
ing political guilt. This happens not
Several conclusions only in regards to certain persons or
The strong relativisation of the term parties, but also in regards to the cur-
poverty that exists in current poverty rent economic system in Germany. At
research, positions the idea of poverty the same time, however, it would seem
closer to the general concept of social that the real poor in our society, the
failing and inequality of lifestyles. All vagrants, homeless, etc., receive scant
personal problems become social prob- attention.
lems and thus become the substance of
→social policy, in particular poverty REFERENCES:
problems. Poverty is not the opposite of KRÄMER, W. (2001), Armut in der

luck and does not refer to how income Bundesrepublik, Volkswirtschaftliche Korrespon-
denz der Adolf-Weber-Stiftung, 7, 1; LIPPE, P.
is utilised by the individual. Poverty is
von der (1995), Lebensstandard und Wirtschaft-
not inequality. ‘Participation’ refers to
ssysteme, Studien im Auftrag des Wissen-
the things required in order to function schaftsfonds der DG Bank, Ed.: Fischer, W.,
as a social being and, as such, is an Frankfurt/ M., pp. 59ff.; DEUTSCHER
objective fact. BUNDESTAG (2000), Lebenslagen in
Repositioning social policy to focus Deutschland, Erster Armuts- und Reichtums-
on the problems of poverty and exclu- bericht, ibid 14/5990.
sion-related policy would alter the sig-
nificance of social policy. Horst-Dieter Westerhoff
To date, social policy presents itself
as a relevant, society-structuring and
fundamental regulation, supplementing Price level stability
policy that is relevant for all citizens.
A society that lives in immeasurable If in connection with economic policy
wealth – compared with earlier times objectives – as, for instance, in the case
and the rest of the world – obviously of the European Central Bank – one
needs a certain degree of conscience in comes across the term ‘price stability’,
order to be able to deal with this afflu- what is actually meant is the ‘stability of
ence. Many humans are also conscious the price level’, as it is more accurately
that the affluence is constantly endan- called, for example, in the German
344 Price level stability
Stability and Growth Act of 1967. The (Erhard, 1964, p.15). In his inaugural
point here is not a lack of flexibility or speech on 18 October 1963 Erhard said:
reactivity of the prices of some goods, ‘Efforts to achieve a stable price level are
but rather the prevention of blanket at the top of the economic agenda.’
price level increases. The aim is there- From today’s vantage point, the
fore to keep the total value of a shop- (economic) damage which inflation
ping basket constant, as opposed to each inflicts has been extensively debated
individual unit price of the numerous both in the light of contemporary theo-
goods and services contained in this ry and empirical observation, and
basket. Precisely because over time makes the above statements particularly
some prices rise, others fall and a third credible. It follows that inflation has a
group remains constant, is an expres- negative effect not only on →growth and
sion of the free play of market forces – →employment, but also on the distribu-
but the sum total of all these changes tion of →income and capital. In a →mar-
have to add up to a stable price level. ket economy, the (relative) prices assume
This is also frequently referred to as a controlling and warning function.
currency stability. If inflation kicks in, it is harder for
The particular importance attached →entrepreneurs to see clearly which
to this issue, especially in Germany, is a goods are really in short supply and
consequence of historical events. As a where new investments are required.
result of two periods of severe inflation Rather, inflation paints a picture of
after the First and Second World Wars shortages and the factors of production
with their subsequent currency labour and capital are channelled into
reforms, particularly the older genera- the wrong places. In the long run, the
tion has become hypersensitive to infla- allocation function of prices is dis-
tion. Against this background, for turbed and growth slows down.
Walter →Eucken a monetary policy that The popular opinion that inflation
focused on currency stability was favours employment and growth
among the key features of the competi- applies only in the short term, if at all.
tive and social system – which he and The apparent choice one had before the
his ordo-liberal Freiburg Circle theoretical background of the Phillips
devised. Curve, culminated in the statement of
Actually, a stable currency is former Federal Chancellor Helmut
assigned top priority: ‘Any effort to Schmidt that one should accept ‘rather
implement a competitive system is 5 per cent inflation than 5 per cent
bound to fail, as long as a degree of sta- unemployment’.
bility of the monetary value has not In the medium- and long-term,
been secured. In a competitive system, however, a positive employment trend
therefore, monetary policy is of the cannot be bought by inflation. The
highest importance.’ (Eucken, 1955, p. workers cannot be deceived for very
256). But for Ludwig →Erhard, too, it long and will (in line with the anticipat-
was obvious that ‘... without a consis- ed inflation) demand higher wages,
tent price stability policy, the social wiping out the short-lived employment
market economy [is] not conceivable’ stimulating effects of inflation.
More recent empirical investiga- an attempt to curb this interest in infla-

tions even come up with the result that tion.
the negative growth effects described Thirdly, financial assets and materi-
above tend to drive up →unemployment, al property are often differently affected
which would be reflected in a positive- by inflation. The danger of material loss
ly inclined Phillips Curve (→conflicting of financial capital in times of monetary
aims in economic policy). depreciation therefore frequently leads
Taking this one step further, if one to an ‘escape into material values’ (con-
considers an open national economy crete gold), which are most likely to
with a system of fixed exchange rates provide protection from inflation.
relative to its trading partners, under Inflation is therefore a hindrance to sav-
these circumstances (higher domestic) ings, and through allocation distortions
inflation weakens the international (mismanagement) leads to a macroeco-
competitive ability of the domestic sup- nomic shortage of productive capital.
pliers. The country’s exports will fall, Finally, there are adverse inflation
while imports will go up. The associat- effects which can result from the taxa-
ed decrease in demand has a further tion system. If, for example, higher
negative effect on the domestic job incomes fall into a higher tax category
market. (progression), inflation results in
Furthermore, inflation can be asso- income redistribution in favour of the
ciated with a number of adverse redis- state and to the detriment of the eco-
tribution effects. On the one hand, the nomic agents. This, too, can have a neg-
theory refers to the so-called wage-lag ative impact on growth.
and the transfer-lag hypothesis. If the From the point of view of distribu-
wage income of the employed, or gov- tion, therefore, inflation comes across
ernment transfer services such as pen- as extremely antisocial, making a con-
sions, social security assistance, rent sistent economic policy focused on sta-
subsidies or child benefits go up more bility the most desirable →social policy.
slowly than the price level, the result is Price level stability plays a particularly
a deterioration of the material position important role at a time when – as now
of these groups of people. – the issue under discussion is a limita-
The creditor-debtor hypothesis, on tion of claims from government and
the other hand, in the context of the social security services, and instead put-
theory of property distribution, ting more emphasis on private initiative
assumes that inflation turns creditors and responsibility. People can make
into losers, because nominally fixed their own provision for old age and bad
claims lose value, while debtors gain times only if they can rely on a stable
from inflation. currency.
This is also the reason why the state As initially indicated, price level sta-
– having become a debtor over the past bility exists, strictly speaking, only
several decades in Germany – is when the inflation rate is zero per cent.
believed to be very keen on inflation. At It follows that the efforts to make price
the European level, the fiscal criteria of level stability qualitatively operational
the Treaty of Maastricht are applied in (useful in practice), have to focus on the
346 Price level stability
search for a standard by which inflation its price goes up simultaneously and
can be measured. Of relevance here is proportionally, there is no inflation. But
how to define a shopping basket (bun- these effects can be sufficiently taken
dle of goods) and how to measure its into account only in exceptional cases,
price increase. meaning that inflation may be over-
Depending on the content of this represented.
shopping basket, one differentiates Particularly in view of the costs of
between indices which are not all inflation detailed above, it has to be
equally clearly defined. Examples welcomed that in recent years – at an
include the deflator of the gross domes- international level as well – there has
tic product, the cost-of-living index of been a growing consensus about the
private households and the import and need to make the protection of price
the export price index. Since the con- level stability the key task of financial
sumer (and voter) is primarily interest- and monetary policy.
ed in the price trend of the goods which Empirical studies have shown that
are typically bought, the cost-of-living issuing banks which are not subject to
index of private households is of policy directives are more likely to
extreme importance in measuring infla- maintain currency stability. Auto-
tion. nomous issuing banks therefore have
In the context of the European lower average inflation rates than
Monetary Union, price level stability in dependent ones, without having to
the euro-zone is monitored with the ‘pay’ for this with lower growth rates.
help of the consumer price index (CPI- The success of the →German Federal
EU), which is itself calculated as the Bank in achieving stability is thus not
weighted average of the harmonised historically unique or exceptional. On
consumer price indices of the member the other hand, the independence of
states. In this context, the ‘harmonisa- the issuing bank is only a necessary
tion’ primarily refers to procedures and condition for price level stability; it can
methods of computation and not so definitely not be interpreted as a suffi-
much to the consumer habits of a par- cient condition to guarantee success.
ticular country.
The European Central Bank made REFERENCES:
its primary objective – price stability – BUCHWALD, W. (1998), Die Harmoni-

quantitatively operational (modus sierung der Verbraucherpreisindises in
Europa, List Forum, 24, pp. 1-12; ERHARD,
operandi) with an inflation rate (CPI-
L (1964), Wohlstand für Alle, 8th edition,
EU) of less than 2%. This limit can
Düsseldorf; EUCKEN, W. (1955),
mainly be explained by procedural Grundsätze der Wirtschaftspolitik, Tübingen;
(measuring) problems. If, for example, ISSING, O. (1999), Stabiles Geld –
consumer habits change without the Fundament der Sozialen Marktwirtschaft,
shopping basket being (immediately) Reden und Aufsätze der Universität Ulm, 2,
adjusted, the price index is no longer up Ulm.
to date and meaningful. A further prob-
lem results from quality variations. If Heinz-Dieter Smeets
the quality of a product improves and
Privatisation 347
Privatisation prise is now able to enter into competi-

tion with public broadcasters.
The spectrum of tasks taken on by the Third, it must be stressed that the
state is not unalterable. Instead, new concept of ‘public good’ depends on
areas of activity are added over time (the whether the individual or group of peo-
expansion of state involvement), while ple looking at it at any one time feel that
other tasks can be considered as settled a certain service has more the character
or else they can be handed over to the of a public good or a private good. It is
market. In the case of the post office therefore a contentious issue whether
and telecommunications in Germany, banking services through local savings
for example, the transfer of services banks ought to remain available in
which had previously been part of the future or whether an appropriate serv-
government budget or →public enterpris- ice by private financial institutions can
es to private actors, leads to more pros- be regarded as sufficient. Accordingly,
perity for society as a whole. The the general policy programmes of the
process of transferring services from different political parties also disagree
government control to the private sec- on which services ought to (still) be the
tor is called privatisation (decrease of responsibility of government authori-
state involvement; another example is ties. This state of affairs may provoke
→deregulation). significant privatisation projects after
A variety of reasons can be behind the most recent change of government
such externalisation processes. In the (→parastatals).
first place, public enterprises were The private sector is keen on taking
established by government in the past over such services if they yield addi-
for the purpose of generating addition- tional income and capital. These result
al revenues. However, it is a fact that on the one hand – provided the servic-
the profitability of public enterprises es are continued – from the efficiency
tends to be below average. Due to their gains described above, or, on the other
privileged position, such institutions do hand, the factors of production con-
not have to contend with competitive nected with the transfer (the privatisa-
pressure, nor do they have to show the tion) can now be put to more profitable
flexibility or customer-orientation of use. The dedication of former military
private enterprises. This is why privati- areas to civilian causes (conversion) is
sation is generally expected to bring just one example.
about lasting efficiency gains. Depending on the individual case,
Second, as a consequence of techni- the most suitable of many different
cal progress it is now no longer correct strategies can be utilised to carry out the
to refer to certain services as ‘public privatisation. Most transfers take place
goods’, nor can ‘natural (state) monop- in return for a payment, which is then
olies’ still be justified. Thanks to savings entered into the government budget as
in the sector of satellite television, for once-off revenue (→public revenue). If it
example, the profit opportunities of has sufficient marketability, it is often
channels funded through advertising best to put the relevant assets up for
have grown so much that private enter- auction in order to determine the sell-
348 Privatisation
ing price. This is the best way of finding controlled. That would make further
out whether any demand for such governmental regulation procedures
properties exists. necessary, the effects of which have to
In terms of the effects connected be compared with the degree of privati-
with privatisation, the following three sation that has been reached (example:
outcomes are possible: the establishment of the regulatory
authority for the telecommunications
• The government institution available sector).
for privatisation may have been oper- Thus, on the one hand, successful
ating at a loss, and this remains the privatisation – thanks to the proceeds
case even after the transfer into the gained and future expenditure on run-
private sector. In such a case it would ning concerns saved – opens up the
initially be hard to find a private buyer. possibility of reducing government
If, however, public interests stand in involvement. These budgetary savings
the way of a definitive transfer, it could then be passed on to the private
might still be expedient from the gov- sector in the form of tax cuts. The state
ernment’s point of view to minimise gets ‘slimmer’, which is reflected in a
the running losses by privatising. This lower government ratio (proportion of
can be done by ‘sweetening’ the sales public expenditure in the gross domes-
offer by means of a certain subsidy tic product). The state becomes more
(→subsidies). The government has to transparent and the government budget
consider this option if the subsidy is less risky.
smaller than the losses incurred Under the right conditions, there-
should the institution remains under fore, the capital market will be prepared
state control in the long term. to reward this by offering more advan-
tageous ways of financing the national
• It is possible that due to the efficien- debt. Alternatively, the additional funds
cy gains that have been described, or that have been freed in this way could
as a result of restructuring measures be used by the state to finance other
implemented by the private sector, a activities. In this scenario, only the
loss-making concern can be devel- structure of the budget would change
oped into a profitable business. while the government ratio would
remain the same.
• By being privatised, government
enterprises that are already making a REFERENCES:
profit can improve their profits. AUFDERHEIDE, D (ed) (1970), Deregulie-

rung and Privatisierung, Stuttgart; EDELING,
T. et al (ed) (2001), Öffentliche Unternehmen –
It follows that in the latter two cases,
Entstaatlichung und Privatisierung, Leverkusen;
all-out privatisation is worthwhile. This
GUSY, C (ed) (1998), Privatisierung von
notwithstanding, it is assumed that con- Staatsaufgaben/Kriterien – Grenzen – Folgen,
sumers can go on expecting to receive Baden-Baden.
the same quantity and quality of goods.
If not, adequate private economic task Dietrich Dickertmann
fulfilment has to be supervised and Peter T. Baltes
Production and supply belong to the factor of production capi-

tal.
A national economy has to be produc- Capital as a factor of production is
tive in order to be able to satisfy its need always ‘material capital’. The accumula-
for goods that are in short supply. This tion of material capital serves the pur-
production of goods includes every sec- pose of increasing future goods produc-
tor of the economy, from the production. The amount of available capital
tion of raw materials (e.g. the mining depends on the extent to which one has
industry) to the processing and manu- initially abstained from consumption –
facture of goods (e.g. the automobile how much has been saved – in order to
industry), all the way to the distribution buy factors of production with the
of goods (e.g. through transport and available financial capital and to develop
trade). In order for the goods to be able material capital, such as in the form of
to be manufactured (as output), certain factories. It must also be remembered
means have to be used (as input). These that in the production process, a part of
means are the factors of production. the material capital is continually worn
There are three different groups of down (depreciation) so that it has to be
factors of production: labour, land and replaced again and again.
capital. Labour is defined as every kind Not only the quantity of capital is
of human activity which is performed important, but also its quality. Here, the
for the purpose of satisfying the needs positive effect of technical progress
of others and which at the same time becomes obvious in the sense that it
serves the purpose of →income acquisi- improves the quality of the factor capital.
tion. The activities of both the employ- This means that over time, thanks to
ees and the entrepreneur are classified technical progress, with the same quan-
as labour (work). tity of capital (as input), a higher produc-
Land is the generic term for all the tive yield (as output) can be achieved.
resources which nature makes available The production of goods is a
(natural resources). Included in this is process in which the three factors of
the land on which industrial plants have production are combined. To do this
been erected and land which is used for successfully, technical and organisation-
agriculture and forestry. In addition, all al expertise is required. This consists in
mineral resources, stretches of water knowing about the best methods of
and vegetation belong to the factor land. production and organisation. Excellent
The factor of production capital technical and organisational know-how
comprises all goods which have been is beneficial for the production process.
produced in the past – but which have It is also beneficial if previous knowl-
not yet been utilised – and with which edge as well as new scientific discover-
→enterprises can manufacture future ies can be put to use rapidly and pur-
consumer goods. These include factory posefully (the contribution of informa-
buildings, machines and tools. Besides tion to the production process).
that, the existing stock of manufactured The macroeconomic production
goods is ranked as capital too. Money curve describes the relationship
(or financial capital) does not, however, between the employment of the factors
350 Production and supply
of production (as input) and the level of have to use financial capital. Since this
goods production (as output). This means that if they have to take out loans
makes it possible to calculate the pro- (or abstain from personal money
ductivity of a national economy as the investments) they will be charged inter-
quotient of the goods output obtained est, the formation of material capital
(in the numerator) and the required depends on the respective level of inter-
input (in the denominator). This total est and the readiness of households to
productivity can then be used to work save.
out the partial productivities for the
individual factors. The work productiv- REFERENCES:
ity, for example, is the relationship BARTLING, H./LUZIUS, F. (2002),

between goods production and em- Grundzüge der Volkswirtschaftslehre, 14th ed,
Munich; FEHL, U. /OBERENDER, P.
ployment of labour.
(2002), Grundlagen der Mikroökonomie, 8th
Division of labour usually has a pos-
edition, Munich; WOLL, A. (2003),
itive effect on productivity. This is Allgemeine Volkswirtschaftslehre, 14th edition,
defined as the specialisation of the fac- Munich.
tors of production on certain activities
and categories of goods. It means that Hans Peter Seitel
workers and enterprises do not have to
manufacture all the products they need
themselves, but that they can concen-
trate on those areas of work and pro- Profit
duction in which they are particularly
efficient. The term ‘profit’, which in everyday
How satisfactory the supply of the usage is a synonym for ‘benefit’,
individual factors of production is in a ‘money-making’, etc., has no clear defi-
national economy depends on a large nition in business administration.
number of factors. Land is by nature Rather, there is a set of terms denoting
limited and can, for example, as a by- profit as a function of the specific pur-
product of the production of raw mate- pose underlying the determination of
rials as well as a location, be expanded profit. Examples of such purposes are:
only to a small extent. The total labour
supply of an economy is determined by • as a way of measuring income;
the total number of people employed • as a creditor’s protection;
and their working hours, while the • as a way of conveying information;
individual worker, when looking for a • as a basis for taxation assessments;
job, will try among other things to and
obtain the best possible wages. Material • as an evaluation of shareholdings.
capital is either produced by the enter-
prises themselves or it is acquired by The →enterprise uses its cost
specialised capital goods producers – i.e. accounting to calculate the profit and to
by other enterprises. assess whether the sale of its products
In order to be able to create (i.e. to or services at their respective prices was
invest) capital goods, the enterprises successful. The profit on the balance
Profit 351
sheet normally forms the basis for the The opposite of profit is loss. In
variable remuneration of managers, the principle, any (positive) balance of basic
distribution of dividends to the compa- figures in the field of business account-
ny’s shareholders and the amount of ancy, i.e. deposits/disbursements,
taxes paid to the national treasury. income/expenditure, returns/expenses,
Moreover, the company profits proceeds/costs potentially represent
serve as information for shareholders profit (→business accountancy: basic con-
and interested members of the public cepts).
regarding the financial state of an enter- In external accounting, profit is
prise. Trade union representatives fre- understood as the surplus of revenue
quently pitch their wage demands after expenditure. Apart from the bal-
against the profit situation of a compa- ance sheet, which is supposed to be a
ny; it helps workers to assess their job reflection of company assets, every
security and banks take a company’s business person is also obliged to draw
profits into account when taking deci- up an annual report in compliance with
sions about credit allocations. the commercial law and which includes
However, there are different ways of a profit and loss account, detailing
calculating profit. While most compa- his/her sources of profit. In contrast to
nies in Germany calculate their profits the balance sheet, which is an invento-
in accordance with the Code of ry calculation at a specific point in time
Commercial Law, many of the large (customary date: the last day of each
enterprises quoted on the stock year), the profit and loss account repre-
exchange have been drawing up their sents a flow-aggregate calculation for a
balance sheets based on either interna- certain period of time (listing of all rev-
tional accounting standards (Inter- enues and expenditures for the calendar
national Financial Reporting Standards, year).
IFRS) or on United States (US) The detailed form of the profit and
accounting standards (US-Generally loss account is legally regulated only for
Accepted Accounting Principles, US- corporations (e.g. limited liability com-
GAAP). pany – Ltd; public limited company –
From 2005 onwards, the majority of plc). Private firms and unincorporated
European companies quoted on the firms (e.g. limited and general partner-
stock exchange will be forced to draw ships) merely have to observe the gen-
up their balance sheets in keeping with eral principles of transparency and
the IFRS. Single annual accounts are completeness.
exempt from this rule, but they must In practice, many →enterprises in
still follow the regulations of the Code Germany use the legal regulations for
of Commercial Law. corporations. The profit and loss
Lastly, when profits are calculated account is supposed to show whether
for fiscal purposes, certain prescriptions and to what extent the main objective of
which differ from the Code of private enterprise – profit – has been
Commercial Law have to be observed, achieved. The literature on economic
which shows that there are numerous management propounds the view that
different parameters to measure profit. the ultimate aim of doing business in a
352 Profit
free market system lies in the maximi- ceeds from the sale of substantial share-
sation of profits. At the same time, holdings), not regularly arising, a-peri-
however, reference is made to the fact odic (e.g. late payments of public
that the principle of profit maximisa- charges) and outside the actual purpose
tion is not to be pursued in isolation but of the business (e.g. donations to chari-
under the observation of secondary table organisations) from the annual
conditions, such as customer satisfac- surplus. The operational result (earn-
tion, social responsibility towards the ings before interest and taxes – EBIT) is
workforce, compliance with environ- frequently used as a profit calculation
mental regulations, etc. before interest and taxes.
Profit and loss calculations are help- For the comparison of enterprises,
ful in making it absolutely clear that the earnings before interest and taxes,
there is no such thing as ‘true’ profit. In depreciation and amortisation ratio
order, for example, to gain an indication (EBITDA) is frequently used.
of the profitability of an enterprise Aside from the profit concepts in
regardless of its current levels of taxa- commercial law and in the cost and
tion, it may make sense to focus one’s results accounting, theoretical concepts
attention on the annual surplus before of profit are also under discussion. In
taxes. terms of the theory of economic profit,
For a more exact picture of the suc- profit is recognised only if the so-called
cess of the actual business activities of capitalised earnings value of the enter-
an enterprise, the operating result tends prise at the end of the financial year
in fact to be used more frequently. The exceeds that at the beginning of the
operating result is calculated by deduct- financial year, provided that there has
ing all the amounts which are not busi- not been a payment of dividend. The
ness related, extraordinary (e.g. pro- capitalised earnings value of an enter-
Income statement of Volkswagen AG, 2005 and 2006

in s million
2006 2005
Sales revenue 53,036 50,245

Sales expenditures 54,238 50,225
Gross profit on sales -1,202 +20
Selling expenses 3,377 3,086
General and administrative expenses 602 505
Other operating income 2,844 2,556
Other operating expenses 1,669 1,683
Financial result +5,216 +4,136
Write-downs of financial assets 1,165 497
Result from ordinary activities +45 +941
Taxes on income -900 200
Net income for the year 945 741
Source: Volkswagen AG
Profit 353
Balance sheet of Volkswagen AG as at 31 December 2006

in s million
Assets 31.12.2006 31.12.2005 Equity and Liabilities 31.12.2006 31.12.2005
Fixed assets 23,583 21,351 Equity 10,254 10,976

Current assets 21,997 22,303 Special tax-allowable
reserves 81 88
Prepaid expenses 22 9 Provisions 18,849 16,858
Liabilities 16,418 15,741
Total equity 45,602 43,663 Total liabilities 45,602 43,663
Source: Volkswagen AG
prise is calculated on the basis of the the financial situation and development
present value of all future payment of an enterprise is called balance analy-
flows, i.e. the future payment flows are sis or, more appropriately, year-end
discounted under application of the analysis.
current interest rate. Only the amount In the process of this analysis, it is
above and beyond what is required for customary to select certain figures for
the safeguarding of the total value of the reference purposes; these also make it
enterprise is considered profit. possible to compare relevant opera-
In the context of balance theory and tional facts between enterprises that dif-
its concepts of profit, a distinction has fer in size. The profit assessment usual-
to be made especially between the prof- ly starts with the balance sheet and
it of the static balance theory and that of profit and loss accounts, which are used
the dynamic balance theory. The static to calculate the reference figures: equi-
balance theory defines the profit of a ty returns, overall profitability and prof-
financial year as growth of assets. The it-turnover ratio. In practice, this tends
dynamic balance theory aims, despite to happen only after an extensive clear-
the time lag between deposits/disburse- ing of the figures.
ments and revenue/expenditure, to
apportion to the financial year the REFERENCES:
appropriate success. This means that BUSSE VON COLBE, W./PELLENS, B.

profit is calculated as the difference (1998), Lexikon des Rechnungswesens,
Munich, Vienna; COENENBERG, A. G.
between the revenue and expenditure
(2000), Jahresabschluß und Jahres-
chargeable to that financial year.
abschlußanalyse, Landsberg, Lech; WÖHE,
In order to be able to decide G. (2000)Munich; PELLENS, B./FUEL-
whether an enterprise has worked prof- BIER, R./LANES, J. (2004), Internationales
itably during a specific financial year, it Rechnungswesen, Stuttgart.
makes sense to process the data con-
tained in the balance sheet and the prof- Marc Richard
it and loss calculation and to make com-
parisons. The examination of year-end
accounts for the purpose of assessing
354 Property
Property is wrong. If, however, many decide,

then some decisions will be moderately
An essential pillar of a functional wrong, some very good and many aver-
→social market economy must be that not age, but gradually the best decisions will
only labour and knowledge, but to a be copied and those which are not so
large extent also houses, land, equip- good will be corrected. Private property
ment, factories, machines, money, secu- offers the basis for independent deci-
rities, pension entitlements, etc., belong sions – but decisions, however, that are
to individual people or are their own in still in →competition with one another –
such a way that they can decide what to and this is an excellent method of dis-
do with them. covery for optimal and innovative solu-
They can consume them or obtain tions in the interest of the society as a
→income from them. They can let or whole (decentralisation function).
lease them, they can bond or sell them, As well as forming the basis for
or give them away or leave them to competitive decisions, private property
someone in their wills. They can use is an ideal motivation for taking good
them to create jobs, change them or economic decisions and executing
take them away. The right to dispose of them well. It lets the owners and deci-
money and objects at will – inherent in sion-makers watch their property grow
private property – is conducive to per- thanks to profits arising from correct
sonal development as well as to family decisions. The fruits of their labours
life (development and family function). can be enjoyed or further investments
Property of all kinds makes people’s can be made. The other side of the coin
daily lives more secure. It gives more is that payment is required for bad deci-
independence to the choice of a place of sions with capital or property losses
work – particularly if the property per- (motivation function).
mits the establishment of a privately A further – and for many an even
owned enterprise. more important – advantage of private
In a situation where property own- property is that it paves the way both to
ership by many is well developed, not economic success and to political free-
only the respective owner but society as dom. This is not only a consequence of
a whole benefits because this makes the economic self-determination or inde-
→market economy possible. It ensures pendence: important political funda-
that, independently of one another, mental rights, such as freedom of
many decisions are made regarding the assembly and freedom of opinion, are
supply of goods and services, as well as best realised when rival political groups
regarding investments in new or mod- get private property; owners put assem-
ernised products and services. bly halls, newspaper columns and free
This is significant because decisions air time at their disposal out of their
always carry risks and uncertainties. own self-interest (freedom function).
They may be right, wrong or partly The advantages of private property
right or partly wrong. If all decision- become particularly clear if the private
making is done in one place and if this property is juxtaposed to the collective
place decides wrongly, then everything property of entire nations. In what used
Property 355
to be →socialism of the Soviet variety, The →Act Against Restraints of

the means of production (the material Competition, with all its restrictions to
capital) were largely collectively owned. ownership rights, is a key component of
While this should have guaranteed the social market economy. Borders
equality, the truth was that it meant open to trade and global competition
extreme inequality in that most of the have the same effect (→globalisation) of
more important economic decisions counteracting market power. Other
were centrally made by only a few peo- legal regulations, such as government
ple, who were keen to preserve their duties, co-determine ownership rights.
personal power. For this reason, and Taxes and duties are meant to ensure a
due to a lack of information, the deci- degree of social equality. However, the
sions did not benefit the majority of motivational effect of private property
people. They were deeply flawed, not must remain intact. Correctly, there-
very innovative and not inclined to fore, tax loads of more than half of a
motivate. What little had been put aside person’s income have been declared
for investments was badly used. Dismal unconstitutional.
economic results were the result, and The role of private property remains
freedom disappeared behind walls, intimately connected with the fact that
tanks and barbed wire. ownership rights are secure rather than
The failed socialist experiment con- arbitrary, even in the case of inheritance.
firms theoretical research in institution- This imposes limitations on inheritance
al economic theory and also a Biblical tax. If property cannot be passed on in
rule. A centralised order is an option sufficient measure according to the will
only if it comes from a wise and benev- of the owner, not only will the motiva-
olent dictator, such as Joseph in Egypt, tion and family function suffer, but also
King David or King Solomon. Such an the provision for the future in the form
exceptional personality is not often at of accumulation of capital for society as
hand. In the Old Testament, the people a whole. If owners of private property
of Israel received clear instructions on can pass on only a fraction of their accu-
the organisation of private property, and mulated capital to their heirs, they will
this remains unaltered in the New be more inclined to spend it on them-
Testament. selves than to save it for future genera-
Article 14 of Germany’s Basic Law tions. If, by contrast, property owners
guarantees private property. At the same can as far as possible pass on property as
time, it postulates that this should serve they deem fit, they will feel obliged
the well-being of the general public (property is an obligation) to ensure that
(society). The extent and limitations of the capital stock is sustainable ecologi-
actual ownership rights must be formu- cally as well as economically (the ‘last-
lated in such a way that property is most ingness’ function of the property). To
profitable for owners when they are think in terms of generations is the best
prepared to offer consumers satisfacto- guarantee of sustainable development
ry services, but not if they try to enrich because children, and property for the
themselves through market power, children, make sense only if life on this
monopolies, cartels and price fixing. planet remains worth living.
356 Protection of freedoms
Among the options property owners tion driven by the independent deci-
have is the detailed design of property sions of private property owners. There
rights by means of voluntary agree- does not seem to be an alternative to
ments. The joint property of several this scenario.
individuals can be vested in communi- However, nothing will change the
ty of property in a marriage, trust funds continually increasing importance of
or unincorporated firms. In large cor- private property in the form of ‘human
porations, not much direct influence on capital’ partly generated through educa-
the use of the property remains with tion, as well as that of intellectual prop-
individual shareholders. With the pur- erty partly generated through research.
chase of new shares, these shareholders
nevertheless contribute to the decen- REFERENCES:
tralised decision-making process by HÖFER, H./WITTE, M. (1978), Wozu pri-

assigning rights of disposal over capital vates Produktiveigentum? in: Otto A.
Friedrich Kuratorium, Grundlagen. Eigentum
to others. And, through the purchase or
und Politik, 3, Cologne; HÖFER, H. (1980),
sale of actual shares, they influence
Eigentum, rechtlich und wirtschaftlich, in:
share prices. This represents an assess- Evangelisches Soziallexikon, 7th completely
ment of the rights of disposal. revised edition, Stuttgart, Berlin; WILL-
In the modern knowledge society, GERODT, H. (1980), Eigentumsordnung
the significance of intellectual property (einschl. Bodenordnung), in: Handwörter-
is growing. There are greater opportu- buch der Wirtschaftswissenschaften (HdWW), 2,
nities of investing in oneself and Stuttgart et al.
through the appropriation of knowl-
edge, of forming human capital. The Heinrich Höfer
young enterprises of the →new economy,
mainly internet and biotechnology
companies, largely consist of human Protection of freedoms
capital into which outsiders can invest.
Through credits or the purchase of The freedom of the individual is a very
shares, these outsiders enable such valuable asset whose value is expressed
companies to develop their knowledge in the fact that personal, constitutional
and to make useful new applications and human rights have been given pride
available in, for example, nutrition and of place in the catalogue of rights at the
health. The rights to intellectual prop- beginning of the German Basic Law.
erty, partially secured by →patents, play a These freedoms include: freedom of
large role. expression, religion, conscience, opin-
Certain expectations of the new ion and the press, academic freedom
economy turned out to be ‘too much and the freedom to teach; freedom of
too soon’. The result was an adjustment association and movement; and free
of company values coupled with painful choice of occupation and place of work.
losses for investors, entrepreneurs and From an economic perspective,
employees. This is an unpleasant and these rights include – as material pre-
seemingly unavoidable side effect of the requisites for free personal expression
trial-and-error based process of innova- and human dignity – the consumer’s
freedom of choice; contractual free- prices. The economic agents are free to
dom; freedom of trade and business; make their own decisions, to pursue
professional freedom; and the freedom their own personal goals and to benefit
to realise personal goals through →com- from their specific knowledge. The
petition with others. incentives inherent in these liberties
It is indisputable that human rights must be seen as the actual reason for the
refer to all areas of life and that they can dynamism and creativity of the market
be reliably granted only in the context economy.
of a democratic state under the rule of A free economy therefore also has a
law. The question of what type of econ- macroeconomic value. It results from
omy should be combined with this the desire of individuals to plan and live
political system receives less unani- their lives according to their own ideas,
mous answers. This is probably due to making the best possible use of individ-
the fact that the constitution does not ual skills and knowledge. The extent of
contain any formally binding rules the macroeconomic effect of this desire
regarding the organisation of the econ- for self-determination is shaped by eth-
omy. The idea of constitutional neutral- ical and legal regulations. Absolute free-
ity in relation to the economic system is dom always was, and continues to be,
nevertheless to be considered as a mis- counterproductive since the individual
understanding. expression of freedom is dependent on
Any compatibility of a socialist cen- the interplay with the freedom of oth-
tralised economy with the Basic Law ers. It is obvious that this conditional
has to be absolutely rejected. The con- relationship equally applies to the econ-
centration of political and economic omy.
power is an intrinsic part of this eco- A functional, humane market econ-
nomic system (therefore inevitable). omy thus requires a deliberately
Centralised planning is basically syn- designed order as well as a market-ori-
onymous with a blueprint for the entated economic and social policy. The
future, implemented and controlled by →social market economy strives to do this
means of binding rules and regula- by pursuing an acceptable compromise
tions.This will surely negate certain between economic freedom and gov-
fundamental economic rights and liber- ernment-induced social balancing Free
ties (→socialism/planned economy). markets require a legal framework that
From this comparative perspective, guarantees the inviolability of: private
the conclusion is inevitable that only a property; professional, business and
→market economy is compatible with the contractual freedom; freedom of associ-
constitution. As a general concept, a ation; freedom to establish a business
market economy entails production and to conduct foreign trade; and free-
processes based on →individual responsi- dom of competition – to name some of
bility, and the distribution and con- the central pillars of economic liberty.
sumption of goods, including services, Freedom of competition is of crucial
production factors and the matching of significance for economic efficiency.
goods on offer and in demand, by way On the supply side, this entails free
of exchange through markets and market entry for potential national or
358 Protestant social ethics
international suppliers with the unfet- into the German economic system in
tered deployment of competitive the form of a complex labour and social
instruments, meaning particularly the institutional framework, and intercon-
free planning of prices, products and nected with a multitude of socio-politi-
other market determinants (quantity, cal measures.
quality) (→open market: market entry, Here, the issue of concern is exclu-
market exit). The resulting market share sively the controversial relationship
and profit gains motivate competitors between individual freedom and
by forcing them to respond. This con- →social justice. The intellectual fathers of
trols the dynamic of market forces as the social market economy considered
well as economic power. both objectives as compatible, provided
On the demand side, freedom of that measures and regulations in the
competition takes the form of a wide realm of social policy conform to the
selection of available goods for the sat- principle of subsidiarity and market
isfaction of individual preferences. This conformity.
relationship between competition and Real-life →social policy in the areas of
results also applies on the factor mar- health, social security, housing, the
kets, such as the labour markets. The labour market and educational and cul-
cartel-like, binding agreements tural policy in Germany does only par-
between the two sides of industry that tial justice to these principles (→social
control wages and other conditions in state and welfare state). In many instances,
the workplace frequently hamper or →individual responsibility and freedom
prevent market and thus scarcity-relat- have been replaced by comprehensive
ed agreements between worker and social security interventions. Due to
management. Unintentionally, but changes and challenges on a global
unavoidably, this often leads to →unem- scale, however, these have now met
ployment. with inescapable financial and ethical
Limitations to free trade, whether limitations.
they are of private, corporatist or gov-
ernment origin, always go hand in hand REFERENCES:
with limitations to freedom. Thus for HAYEK, F. A. v. (1971), Die Verfassung der
the protection of individual liberties a Freiheit, Tübingen.
policy that actively promotes competi-
Helmut Leipold
tion is important, as it is supposed to
prevent or at least control the concen-
tration of economic power on the sup-
ply and demand sides. Protestant social ethics
The tense relationship between
market and freedom is mirrored by the Ethics refers to the doctrine of right-
relationship between →social system and eous human actions and behaviour and
freedom. As previously mentioned, a commitment to human responsibility.
→social balancing forms a central part of The word social – derived from the
the concept of a social market economy. Latin socialis (socius, originally meaning
This concept has been incorporated ally) – has undergone a marked concep-
tual shift. ‘Social’ originally referred to Through its expansion, the word
man as a social creature (animal sociale) social gained a dual tension – the ten-
and the fact that human beings live sion between individual and society,
together, above all in the home (vita between individualism and collec-
socialis: St Augustine). During the tivism; and also the distinction from
Middle Ages (Thomas Aquinas), social community in the sense of interperson-
became synonymous with political. By al in a linguistic usage which under-
the beginning of the Modern Age, stands social in terms of social institu-
however, sociality (socialitas) had devel- tions, social facilities. Social ethics, too,
oped into the fundamental concept of a makes use of this blurred definition of
rational doctrine of natural law (→liber- social.
alism). The social sciences, and especially
Since the 18th and 19th centuries, sociology, are sciences that came into
the meaning of the word social became being with the Age of Enlightenment
transformed again, in two different and as a result of the social conse-
ways: quences of the Age of Industrialisation.
Protestant social ethics was born out
• J. J. Rousseau formulated the idea of of sociology, or the empirical social sci-
a social contract (contrat social, or ences. The Lutheran theologian
rather pacte social). The term social is Alexander von Oettingen, who was
now distinct from the term political; then teaching in Dorpat (today’s Tartu
in other words, the distinction in Estonia), was the first to use the term
between society and state has taken ‘social ethics’ in the title of an 1867
root. Society and economy are liber- book. He makes reference to moral sta-
ated from state control and grow into tistics, which prove the existence of a
independent areas of life. social order. Through the neologism
social ethics, he endeavours to distance
• The term social is particularly closely himself from an exclusively mechanis-
connected with the social conse- tic definition of social processes (social
quences and problems of the indus- physics, social determinism) while also
trialisation and of early capitalism. taking a stance against a purely one-
New concepts, such as the social sided view of ethics as referring only to
question (which used to be referred individual and personal acts.
to as the question of the working This means that the term social
class) are proof of this development. ethics has to fulfil a dual function: on
At the same time, new composite the one hand, scientific description and
words arose, such as social move- the analysis of social processes is to be
ment, social organisation, social revo- linked with evaluations and normative
lution, →social justice, →social policy, judgments (prescribing). This question
→[social] welfare state and social law. can also be interpreted as the epistemo-
Social issues are usefully brought up logical distinction between what is and
when demands for social equality and what ought to be (= reality and ideal).
solidarity are formulated. Inequality On the other hand, social ethics is
is referred to as unsocial. about the consideration and evaluation
360 Protestant social ethics
of social structures, institutions and the →social market economy. It is the task
organisations, which are generally of academics to conduct a critical exam-
called orders or institutions: examples ination and investigation of the philo-
are marriage and family, →property, sophical principles and objectives of all
labour, the state, the law, culture and these examples. This is why social
academic institutions. In this regard, ethics is a discipline that is easily trans-
questions such as the following become formed into an ideology.
evident: The basic principles of social ethics
are often debated by theologians. The
• Are there structures and conditions in Catholic Church postulates a universal-
science, politics and social ethics with ly binding natural law, and thus presup-
their own inherent laws? This con- poses a social philosophy. Protestant
troversial idea of the existence of social ethics refers to the Bible. In this
inherent laws, defines ethical actions context, a number of different models
through their limitations and condi- of thought may be used for guidance.
tions. The Lutheran tradition, for example,
makes a distinction between divine rule
• How can structures be changed? in the worldly realm and God’s spiritu-
al rule over the community of believers,
• How can individuals influence these the Church. The worldly rule must be
structures by their actions? measured by reason.
The reformed point of view, or the
• How can responsibility be practised view promoting social transformation
in social institutions? (such as religious socialism), sees the
kingdom of God as a socially trans-
In addition, community – natural forming force able to bring about a
circumstances, such as the bio-social world of peace, justice and support for
concept of marriage and family – has to the poor.
be distinguished from society, i.e. man- Protestant social ethics therefore
made organisations (such as →enterpris- represents a variety of social ideologies
es, trade unions and associations). and uses various arguments (it refers,
The breadth and indefinite charac- for example, to causes of reason or to
ter of the term social ethics leads to a religious postulates of obedience).
large range of socio-ethical ideas and Social complexities and the variety of
concepts. Behind each example of cultures (pluralism) are thus reflected
social ethics is a social model, a social in a number of stances adopted by
theory. social ethics.
Often, such models are not explicit- The need, however, for theology
ly named; they are akin to ideals and and the Church to participate in public
utopias. Such a model can, for example, discussions on social, economic and
be the classless society, the capitalist political events and objectives is uncon-
→market economy derived from liberal- tested. It should be seen as a public
ism, a responsible society, a society with appointment for the involvement with
an ecologically sustainable economy or social or rather universal issues.
Public debt 361
In addition, there are now many Public debt

statements and declarations by the
Church (commemorative volumes) on Apart from public dues (taxes, fees,
social topics, and there is increasingly contributions) and acquisition income
more understanding that expertise (fac- (from →public enterprises), incurring
tual comprehension) has to be seen as a public debt benefits the attainment of
prerequisite of programmatic demands. income of the federal government, fed-
This is why a global social theory (social eral states and municipal budgets. The
ethics) has become more and more public debt is characterised – in the
divided into ethical areas (such as ethics same way as acquisition incomes,
of economy, ethics of technology, bio- though different from taxes (due to
ethics, ethics of science, international coercion in this case) – by the voluntary
ethics and political ethics). There is still nature of the funds contribution, if one
a need to design a comprehensive social disregards the case of a mandatory loan
theory, an overview of social impera- (equal to a tax with a repayment claim).
tives. Market economy principles apply:
Lastly, an important fundamental as demanders in the money and capital
question remains: Who should be seen market, the public authorities are com-
as representative of a system of social peting with the private loan demanders
ethics and who should be targeted? Is it in that arena. The capital suppliers
the believers, the Church? Is protestant (domestic banks, institutional investors,
social ethics an ethics of ecclesiastical private households and →enterprises, as
responsibility, or does it apply to culture well as corresponding investor groups
as a whole by claiming to make univer- abroad) relinquish their liquidity (capi-
sally comprehensible and universally tal) to the state in return for market
binding suggestions? interest. The funds from the debt
It follows that protestant social (treasury notes, treasury bills, financing
ethics has to engage in an ongoing treasury bonds, federal treasury notes,
review of its own position, without for- bonds) have a limited duration; they are
getting to include the Church and the to be repaid to the creditors through
question of its own concept of itself. redemption payments.
The national debt generally serves
REFERENCES: the purpose of adjusting the temporary
HONECKER, M. (1995), Grundriß der imbalance of revenue and expenditures
Sozialethik, Berlin; KÖRTNER, U. H. J. of the public budget. On the one hand,
(1999), Evangelische Sozialethik, Göttingen;
the purpose is to bridge a current short-
HENGSBACH, F. (2001), Die andern im
term liquidity deficiency of ways and
Blick. Christliche Gesellschaftsethik in den Zeiten
der Globalisierung, Darmstadt.
means advances. On the other hand,
the funds are used to finance expenses
Martin Honecker in the form of covering loans.
The national taking up of credit has
to be differentiated between net and
gross raising of credit: net borrowing is
the part of the entire credit raising (gross
362 Public debt
raising of credit) that is not applied to borrowing may not exceed 3% of gross
debt repayment (follow-up financing), domestic product (GDP) and total debt
but rather is being used to finance new may not exceed 60% of GDP (in each
expenditure (new net borrowing). case at market prices) (Article 104 of the
Through debt, the public authori- EC Treaty in connection with the proto-
ties not only expand their present scope col on the procedure to deal with an
of action but also assume future obliga- excessive deficit).
tions in the form of the debt service Above all, the national debt pursues
(interest charges and repayment). It is the fiscal objective of raising funds.
for this reason that public accumulation Beyond that, non-fiscal objectives are
of debt is bound by legal norms (debt also envisioned: concerning the stabili-
restrictions). sation and the growth objectives, the
Article 115 (1) of the German Basic funds are used to support market per-
Law and paragraph 18 of the federal formance by implementing activities to
government budget regulations govern- improve demand or supply.
ing state credit financing prohibits new The objective of inter-generative
net borrowing exceeding the sum out- burden-sharing is based on the concept
lined in the budget for investment of financing the state’s capital expendi-
expenditure. Exceptions are permissible ture (for example, for infrastructure)
only when protection against a distur- through debt, as its use on behalf of cit-
bance of the macroeconomic equilibri- izens extends over a longer period of
um is required. Furthermore, similar time. In this way, future generations
restrictions are outlined in the European which are the beneficiaries of a current
Union Treaty: according to the budget investment expenditure will have to pay
criteria of the treaties of Maastricht the debt service by future mandatory
(1992) and Amsterdam (1997), new net taxation. Thus, the timing of the distri-
Germany’s federal and regional debts, 1950–2006

General government consolidated gross debt of the EU-27 as a percentage of GDP
Grundlagen der Staatsverschuldung, in:

bution of use and burden is harmon- Wirtschaftswissenschaftliches Studium, 5, pp.
ised. 218ff.; WERNER, G. (2000), Finanzpolitik
But public debt also fulfils a political in der Europäischen Währungsunion or
objective in the sense that citizens pay Dauerhafte Erfolge erfordern zweigleisiges
less attention to this sort of revenue Vorgehen – Konsolidierung und Entlastung,
than to tax increases; and this means Stellungnahme, 27, Wiesbaden; ZIMMER-
that there is less resistance from the MANN, H. (1999), Ökonomische
population. It is true that this improves Rechtfertigung einer kontinuierlichen
Staatsverschuldung?, in: Zur Zukunft der
the re-election chances of politicians.
Staatsfinanzierung, Baden-Baden, pp. 157ff.
The shortsightedness of this policy,
however, ignores the future interest and Dietrich Dickertmann
repayment obligations, and the restrict- Annemarie Leiendecker
ed room for manoeuvre that is their
long-term consequence. This allows
the indebtedness to grow to the point
where a budget consolidation (decrease Public enterprises
of new net borrowings until a budget
surplus has been achieved, allowing the In its role as service provider, the state
net repayment of debts) becomes makes use of its administrative appara-
inevitable. Usually, this requires a tus (offices and authorities) and a great
restrictive financial policy with all the variety of disincorporated organisations
consequences for citizens who are used which work along company lines, all
to being pampered. the way up to commercial →enterprises
as they are found in the private sector. If
REFERENCES: they are government-owned or admin-
CAESAR, R. (1991), Theoretische istered, all of these fall into the category
364 Public enterprises
of public enterprises. There are essen- al that rely on a network-like infrastruc-

tially four different motives underlying ture for transport (for example, rail-
the establishment of such public enter- ways, waste water disposal). The high
prises. fixed costs and the resulting long-term
average cost decrease make these servic-
Services that could in principle be es relatively unattractive to private
satisfied by the open market enterprise. Alternatively, the supply of
For political or financial reasons, these public services (public goods) through
services are produced or offered by the private enterprise may be unsuccessful
state. Depending on the kind of organ- because users tend to be unwilling to
isational structure concerned, these pay for them on an individual, volun-
services are provided by state adminis- tary basis, for example, street cleaning,
tered or publicly managed independent fire insurance. The legislator reacts to
enterprises, which are either state these imperfect market conditions by
owned or which have been disincorpo- authorising the relevant administrative
rated. The former are not self-adminis- bodies to make user-subscriptions or
tered and their revenues and expenses fire insurance compulsory.
are incorporated into the general budg- Apart from the legally dependent
et (for example, an in-house printing government-owned enterprises already
works or a gardening department). mentioned, such services are typically
Publicly managed enterprises, once provided by legally, organisationally and
they have reached a certain size, assume economically independent enterprises,
the status of independent organisations some of which are classified as →paras-
as a way of avoiding the inflexibility tatals. Organisations led by member-
inherent in state administration. For ship, such as →chambers and guilds, are
this purpose, their assets are disincor- constituted as bodies of the public law.
porated from the public budget, a sepa- For the sake of certain non-profit caus-
rate accounting is established and a es which transcend the day-to-day
responsible management. But these political agenda, it is possible to estab-
enterprises have no legal independence; lish public law foundations whose
their services for other administrative funds are tied to a specific purpose (for
units are generally charged at prices example, the German Consumer
exclusive of a profit margin, merely Foundation ‘Stiftung Warentest’ and
covering costs, and are then listed in the the German Federal Foundation for the
general budget of the government level Environment).
concerned, with the annual remittance
of profit or coverage of losses. Typical The services on offer can have a political
examples of this form of public enter- motivation
prise are local transport companies and This is the case in areas where market
suppliers of electricity. supply is usually easy or at least possi-
ble, but where, for political reasons, a
Other goods and services classified as qualitative and quantitative adjustment
public utilities of the outcome is on the political agen-
These are services of supply and dispos- da. These publicly offered goods are
called merit goods. If they are cus- their below-cost prices, cause a massive
tomer-based institutions, they tend to upheaval in the market of private sup-
be registered as institutions of the pub- pliers.
lic law (examples: savings banks and
regional banks, public radio and televi- REFERENCES:
sion stations). BUNDESMINISTERIUM DER FINAN-

ZEN (ed) (2000), Beteiligungsbericht 2000,
Bonn; KILIAN, M. (1993), Nebenhaushalte
Commercial activities
des Bundes, Berlin; TIEPELMANN,
Finally, public enterprises can also be
K./BEEK, G. van der (ed) (1997), Politik der
potential candidates for commercial Parafiski, Hamburg.
activities, which offer goods or services
at prices that either cover production Dietrich Dickertmann
costs or yield a limited profit. Viktor Wilpert Piel
Such ventures can, or are supposed
to, express the official reasons for pro-
duction; they also tend to adopt the
same legal and organisational forms as Public expenditure
private enterprises. This more com-
mercial approach goes hand in hand In a →social market economy, certain serv-
with easier adaptability to changes in ices that benefit the public are provided
the market, as well as more productivi- by the state because the market does not
ty and profitability. It is, however, hard- supply them in a satisfactory way. These
er for the state to exercise influence and services in their different forms are the
control. And while it is true that in way the government participates in the
looking for business returns (without economic process.
profit limitations), the political objec-
tives tend to take the back seat, the next • On one hand, these apply to inter-
step is the →privatisation of public enter- ventions which influence the private
prises and the creation of a leaner state. supply and demand in the form of
Generally, it would be desirable to laws and regulations without having a
see public enterprises that are operating direct impact on the budget.
more or less outside the confines of the
main budget (of the →Federal Republic, • On the other hand, they concern the
federal states and municipalities as well as collection of taxes and levies and the
the →EU) being forced to greater expenditure of public means, which
transparency and more detailed report- does have a considerable impact on
ing. This would give the respective gov- the budget.
ernment authority in charge more
insight into their activities and how With a view to the →market economy,
successful they are. This is the only way there is above all the expenditure that
of actually making purposeful, detailed goes to the preservation and security of
political policies a reality. Furthermore, the state and to the protection and free
only in this way can public enterprises development of the market. This
avoid unacceptable losses and, through expenditure forms a considerable pro-
366 Public expenditure
portion of the overall national expendi- eign trade relations and income distri-
ture, such as that spent on defence and bution.
on the judicial system. At the core of this sort of analysis
In terms of precisely where the tends to be the effect of public expendi-
money goes in the economic produc- ture on demand. It is assumed that pub-
tion and distribution process, public lic expenditure for the purchase of
expenditure can be further divided into goods is passed on to the market in its
public administrative expenditure (per- entirety and has an immediate effect on
sonal and material expenditure) and demand, while transfer payments are
cash payments (transfer payments): only partly and indirectly converted
administrative expenditure includes into market demand by their recipients,
remunerations for services in the factor since at times part of the money is
and goods markets (salaries or remu- saved. This is relevant to the descrip-
neration for civil servants and public tion of the so-called multiplier and
service employees, and material expen- accelerator effects: since additional
diture for current necessities and for demand turns into →income for the
investment purposes). suppliers (primary effect), a certain part
The resources going to the public of that translates into demand a second
sector are no longer available to the pri- time because these persons equally
vate sector. For cash payments (trans- spend a part of their income (multiplier
fers to private households, →subsidies to effect). The renewed income formation
private enterprises), nothing is offered arising from the secondary effect closes
in return apart from the adherence to the circle.
certain conditions regarding the receipt The demand stimulus triggered by
and the utilisation of payments. The public expenditure usually does not
consequence of such payments is a correspond precisely to the amount
redirection of the purchasing power spent, but can deviate from this
without any direct utilisation of upwards (such as in the case of sub-
resources being made (such as →social sidised interest as an incentive for
security benefits in the form of transfers to investments) or downwards (such as in
private households for the purpose of the case of staff remuneration and pro-
improving their specific financial situa- portional savings). But public expendi-
tion; subsidies for enterprises for better ture can also be supply-orientated, such
→environmental protection). as in the case of educational expendi-
This public expenditure classifica- ture or fund allocation for the promo-
tion is the basis of an analysis of its tion of research.
macroeconomic effectiveness and the In view of the effect on macroeco-
extent to which objectives are met. It is nomic productivity increase, public
to be investigated how a change of the expenditure can also be classified as
volume of expenditure on the one either investment or consumptive. The
hand, and a change of the structure of former usually ranks more highly in
the expenditure on the other affect macroeconomic terms. But it is impor-
→price level, →employment, structure and tant to note that investments involve
→growth of the economy, as well as for- certain ancillary costs which represent
Public revenue 367
consumptive expenses. This means that BEIRAT BEIM BUNDESMINISTERI-

the growth of public capital assets also UM DER FINANZEN (1994), Perspektiven
entails growing consumptive expenses. staatlicher Ausgabenpolitik, Schriftenreihe des
Bundesministeriums der Finanzen, 51, Bonn.
It also has to be pointed out that the dif-
ferentiation between capital and con-
Dietrich Dickertmann
sumptive public expenditure has Annemarie Leiendecker
important repercussions for the per-
missible limit of net new borrowings as
part of the public revenue (→public
debt). According to Article 115 of the Public revenue
Basic Law, this must as a rule not exceed
the amount of the investments. For the active implementation of their
The sharp rise of public expenditure public functions, the regional govern-
over the past several decades has led to ment authorities are dependent on con-
an increase of the government ratio as a tinuous public revenues. Thus, the pri-
proportion of public expenditure in the mary function of this revenue is a
gross domestic product. Since the rise financing function. The most impor-
of public expenditure has also led to tant sources of revenue for public
higher tax and social security contribu- budgets are taxes. These are used to
tions as well as to an increase in the finance comprehensive state functions.
public debt, severe political and eco- In particular, they are used for public
nomic problems have been the conse- services (public goods) whose use and
quence. payment cannot be attributed to an
The public financial system is losing individual citizen (examples: internal
its credibility regarding its adherence to and external defence) or based on a
the market system. This is based on the political decision for public goods
idea that market forces have preference whose payment by an individual user
before government interventions may not be desirable (examples:
(→interventionism). At the macroeco- schools, studies). Thus, taxes are a
nomic level, the growth and employ- mandatory contribution on behalf of
ment potential of the private sector are the citizen for which they do not have a
weakened by excessive taxes and levies. right to a specific immediate service in
return.
REFERENCES: Accordingly, taxation can be tied to
DICKERTMANN, D (1991), Die criteria – primarily the capability of the
Systematisierung öffentlicher Ausgaben taxpayer (ability-to-pay principle).
nach administrativen und volk-
References for taxation can be found in
swirtschaftlichen Merkmalen I/II, in: Das
the →circular flow of incomes in the econ-
Wirtschaftsstudium, 2, pp. 121ff., 3, pp. 190ff.;
STERN, V./ WERNER, G. (1998), Durch
omy. Taxation occurs, for example, in
Einsparungen die Lasten mindern – the case of the trade or corporate profits
Notwendigkeit und Möglichkeiten zur where the factors of production (labour,
Begrenzung der Staatsausgaben, ed. vom Karl- land, capital) are implemented for the
Bräuer-Institut des Bundes der Steuerzahler, generation of goods. Personal income
89, Wiesbaden; WISSENSCHAFTLICHER generated (wages, salaries, interest)
368 Public revenue
Distribution of taxes and contributions in Germany, 1965–2006

in percent (%)
West Germany Federal government States Municipalities Others*
1965 55.3 30.7 12.4 1.6

1975 49.2 34.0 13.8 3.0
1985 47.2 35.3 14.1 3.4
Germany
1991 48.0 34.4 12.8 4.8
1995 45.0 38.1 11.6 5.3
2000 42.9 40.3 12.2 4.6
2005 42.1 39.9 13.2 4.8
2006 41.7 39.9 13.8 4.5
* Others: LAG, EU-Proportion, customs duties

Source: Federal Ministry of Finance
attracts taxation in the form of tax on (collection competence) as well as the

wages and income tax as well as invest- right to use the funds for their own
ment income tax and withholding tax budgets (revenue competence). In
on interest. Germany, these competences are struc-
In addition to income, consumption tured in a very complicated manner
is taxed by a general value added tax (→fiscal federalism). Besides taxes, factor
(VAT) as well as through a multiplicity incomes are charged in connection with
of specific taxes (such as fuel tax, elec- the voluntary or designated use of spe-
tricity tax, sparkling wine tax, tax on cific public services.
tobacco) to finance the public budget. If the use is of an individual nature
These are taxes on the flow of yields with a traceable immediate personal
being continually generated. benefit, the payment is made in the
Apart from the real estate tax, form of fees. These fees are incurred
Germany no longer taxes private prop- with the use of a public facility (exam-
erty. Taxation is limited to asset trans- ples: toll roads, tuition fees) or an
fers of property (donations, inheri- administrative facility (examples: court
tances) as well as to the purchase of fees, civil registry office fees) or for the
land. The taxation of imports of foreign transfer or conferment of certain utili-
products through tariffs is of decreasing sation rights (examples: franchise tax,
importance as these are continually royalties).
being lowered internationally. Thus, Depending on the aims and objec-
tariff payments in this context belong to tives of the state service provider, the
the category of direct revenue of the calculation of fees can be set according
European Union (→EU: budgeting). to:
The distribution of tax revenue
among regional government authorities • the politically desired demand;
depends on the assigning of rights to • the production costs; or
determine the form and amount of tax • the price the users are willing to pay.
Public revenue 369
Increasingly, the rule regarding the expenditure are closed. In the event of
amount follows the market (i.e. the temporary financial difficulties, short-
price that is determined by the utility of term cash advances (or in the case of a
service for the user) (equivalence prin- longer-term deficit, medium-term
ciple). operating loans) are granted. In the case
The financing of public services of the latter, →public debt can, besides
whose utility can be assigned to a group serving a fiscal purpose, also fulfil
is financed through dues payable for the another function: it is a way of financ-
user. Payment is not always based on ing additional, or stabilising, →public
actual use of the service; it is sufficient expenditure aimed at balancing a lack of
to illustrate that a restricted group has demand in the economy as a whole and
the possibility to benefit. Here, too, phases of economic weakness (reces-
political motivation can be at the root of sion).
the contribution amount, as when the Debt may also make it possible to
cost of the use of a kindergarten varies create a balance between today’s and
according the number of children in a future generations, if investments are
family or the income of the family. The financed in this way. The investments
desired revenue structure may not be yield their benefits when the debts plus
sufficient to cover the cost: this is a fea- interest are being paid, i.e. future gener-
ture of needs-orientation of public ations harvest what has been sowed, but
service provision and the correspon- they also have to service the debt and
ding and connected public interest (real carry the burden of the investment.
transfer). Contrary to this motivation Financing through debt becomes
are profit-oriented private enterprises problematical when the present genera-
aimed at cost efficiency and profit. This tion derives the benefit (consumptive
would be equivalent to an additional expenses being covered), while the
tax. burden of repayment falls on a later
To a limited extent, government generation. Moreover, high debts can
authorities also pursue financial gain, substantially restrict the flexibility of a
particularly in the form of →public enter- budget if interest payments and repay-
prises and state investments, which may ments swallow up a large proportion of
earn additional income in the form of the tax revenue.
profits and other capital proceeds. An Besides providing a financing func-
example is the profits that accrue from tion, public revenue can also be used as
the participation of the →German an instrument to control the public
Federal Bank in the European Central services (control function). In this con-
Bank, despite the fact that the bank’s text, revenue may be of secondary
activities are generally not aimed at the importance. In such cases, the individ-
accrual of profits. In addition, the treas- ual and general economic consequences
ury may derive one-off capital gains of the collection of revenue can be seen
from the privatisation of public assets or as interventions for the purpose of
licence sales. achieving certain specific objectives
Public borrowing ensures that the (example: the environment tax for
remaining gaps between revenue and reduced energy consumption with
370 Public revenue
simultaneous compulsory allocation of plethora of resulting overlapping effects

the collected revenue for →pension would, however, not only blur the gen-
insurance). eral view but would also have a negative
Theoretically, steering or control and disruptive impact on the →market
taxes could be implemented for the economy. This is why allocation-orient-
government’s entire target bundle. The ed taxes are very controversial.
Income tax plus employee and employer social security contributions, 1998 and 2006
in percent of labour costs*
1998 2006
Country** Total tax Income Social Labour Total tax Income Social Labour
wedge tax security costs*** wedge tax security costs***
United Kingdom 32 15 17 29,277.34 16 18 55,171

Belgium 57 22 35 40,995.55 21 34 54,896
Germany 52 17 35 35,863.53 18 35 54,129
Austria 46 8 38 29,823 48 12 36 51,075
Luxembourg 34 10 24 31,102.37 12 25 49,944
France 48 10 38 28,198.50 11 39 49,813
Netherlands 44 6 38 32,271 44 12 32 48,986
Sweden 51 21 30 29,768.48 18 30 46,396
Switzerland 30 9 21 32,535 30 10 20 46,196
Norway 37 19 18 31,638.37 19 18 45,337
Finland 49 22 27 29,334.44 19 25 44,693
Japan 20 6 14 27,664 29 6 23 44,469
Korea, South 15 1 14 22,962 18 3 15 43,729
Australia 25 24 1 29,590.28 22 6 40,770
Greece 36 2 34 17,880 41 7 34 39,243
Denmark 44 34 10 32,214.41 30 11 38,956
Iceland 25 20 5 22,545.29 23 6 36,775
Italy 47 14 33 32,351.45 14 31 36,585
Canada 32 20 12 32,211.32 15 17 36,137
Spain 39 11 28 24,454.39 10 29 35,209
United States 31 17 14 31,300.29 15 14 35,045
Ireland 33 18 15 24,667 23 9 14 32,945
New Zealand 20 20 0 24,332.21 21 0 28,346
Portugal 34 6 28 13,903 36 8 28 25,849
Turkey 40 21 19 15,825.43 13 30 24,993
Czech Republic 43 8 35 15,781 43 7 36 21,777
Hungary 52 12 40 9,916.51 15 36 19,685
Poland 43 11 32 12,696 44 5 39 19,130
Mexico 22 0 22 8,662.15 3 12 11,026
* Single individual without children at the income level of the average worker
** Countries raised by decreasing labour costs in 2006
*** Dollars with equal purchasing power; total annual labour costs for the employer
Source: OECD: Country submissions; OECD Economic Outlook

Public–private partnerships 371
Generally speaking, the amount and in the United States (US), where such
structure of taxation (tax and contribu- forms of cooperation have existed since
tion ratio or taxation ratio) are impor- the 1940s. Since the 1970s they have
tant for each citizen. They determine been involved as a significant element
the level of the residual income and of the public activities in that country.
→profits, and thus also the margin At that time, the US had an enormous
remaining at the disposal of the citizen. number of problems and the public
This also applies when the tax burden is sector, with its antiquated structure,
directly compared with the associated could no longer cope with these. In the
public expenditure as fictitious return. course of the economic stagnation and
In a market economy, personal deci- simultaneous inflation (stagflation), the
sions are of primary importance and federal government withdrew from its
have to be seen as an indirect limitation services, which caused the problems
of the public tax burden that needs to facing the municipalities to grow fur-
be taken into consideration. ther. After a dramatic breakdown, a
large number of reforms were intro-
REFERENCES: duced, which ended the sharp demarca-
BUNDESMINISTERIUM DER FINAN- tion between state and private sector
ZEN (ed) (2001), Steuern von A-Z, Ausgabe function, and which led to intensified
2001, Berlin; DICKERTMANN, D./
cooperation between public authorities
GELBHAAR, S. (1994), Das System der
and private investors.
öffentlichen Einnahmen, in: Steuer und
Studium, 5, pp. 214ff.; STALDER, I. (1997),
There is a great deal of literature on
Staatsverschuldung in der Demokratie – Eine PPPs, but a clear definition of the term
politik-ökonomische Analyse, Frankfurt/M. does not exist. The list of the possible
fields of application is long. PPPs are
Dietrich Dickertmann possible in urban development, the
Viktor Wilpert Piel transport sector, housing construction,
cultural institutions and the education
sector, as well as in the provision of
Public–private partnerships internal and external security and
defence. Besides the great variety of
A public–private partnership (PPP) is a possible projects, the project size can
special way of implementing and con- vary greatly as well, and there are
trolling public functions through coop- countless PPP possibilities in the edu-
eration between government authori- cation and transport sectors.
ties and private investors. For many Despite the heterogeneity of the
years, PPPs have been at the centre of a term, PPPs have to be distinguished
heated debate, which was prompted by from the term →privatisation. As the
the recognition that public services are term ‘public-private partnership’
in need of restructuring. already suggests, this form of coopera-
The debate is still relatively new in tion is situated in-between governmen-
Germany, but it is gaining in relevance tal activity (execution of a task by the
because of the scarcity of public means. state itself) and material privatisation
Public–private cooperation originates (pro forma and actual transmission of
372 Public–private partnerships
public vested titles and activities to pri- public services to private investors and
vate investors). The term would be less the possibility of saving costs through a
succinct if it denoted any possible coop- more efficient private supply of the
eration between the state and →enter- services concerned by these private
prises. To equate PPPs with privatisation actors. The private investor is mainly
could conceivably lead to positive interested in the realisation of profits.
effects of the PPPs being left undis- But quite differently, non-materialistic
covered, since privatisation became an motives such as an enterprise trying to
emotive word in the current economic advertise its public image, may also play
policy debate. A definition of the term a part. By and large, it is a win-win sit-
PPP should therefore be not as broad as uation for both sides.
possible but as narrow, and thus as pre- It would be wrong, however, due to
cise and appropriate, as possible. the opportunities of public-private
Due to the large number of possibil- partnerships, to regard PPPs as a
ities of application, the specific area of panacea for the government’s urgent
application is not a suitable criterion for funding problems. The risks of this sort
definition. But the conditions for PPPs of cooperative venture do not allow
are of great importance. Cooperation is that. Apart from the problem of asym-
by its nature voluntary. Goal compati- metrical information distribution
bility and the possibility of obtaining between the partners, there is also
synergy effects are therefore crucial cri- uncertainty about the quality and effi-
teria for definition. A partnership is ciency of the private investor. The long
therefore possible if both sides achieve life of many contracts makes this a par-
goals that they would not achieve alone. ticularly important issue. Beyond that
If one defines PPPs on this basis in the there is a danger of moral hazard due to
narrow sense of the word, the following diverging motives. There is also the risk
applies: a PPP is a form of interaction that should the two contracting parties
between government actors and private incur financial losses, these will be
investors focused on the pursuit of passed on to a third party (the citizen)
complementary goals and the realisa- in the form of higher fees (rent seek-
tion of the synergy potential of cooper- ing). This brings up the question about
ation. The partnership is process orien- democratic legitimacy, since control
tated, whereby the identity of and mechanisms are largely lacking.
responsibility for each side’s own Thus PPPs have to be made to com-
actions remain intact. The partnership ply with a number of important condi-
relationship is contractually laid down. tions. The first is goal complementarity,
PPPs offer many opportunities both and moral hazard behaviour and the
for the public authority and for the exploitation of third parties has to be
investor. This can largely be interpreted prevented. This requires contractual
as the realisation of synergy effects. control and enforcement mechanisms.
There are a number of variants of the PPPs should also not simply be copied,
mutual advantages. For the public but the individual requirements of the
authority, these include the transfer of respective project must always be con-
the operational risk of the production of sidered. In order to be successful, PPPs
have to conform to strictly market and ing massive exodus of East Germans to
outcome-orientated principles, which West Germany. These measures were
are reflected in a clear process structure modelled on West German experiences
and an appropriate project organisation. in the industrial and regional promo-
Underlying power structures and any tion of the economy.
incentives inherent in a project and Financial assistance in the form of
problems have to be disclosed, thus capital investment grants, securities,
making it possible for the rules of the soft loans and tax concessions – such as
partnership to be clearly spelled out in accelerated depreciation (→subsidies) –
the contract. were meant to stimulate private invest-
ment and business start-up activity (see
REFERENCES: figure, next page), while initially also
BUDÄUS, D/EICHORN, P. (1997), Public smoothing the path to privatisation of
Private Partnership – Neue Formen öffentlicher former state enterprises (→Treuhand
Aufgabenerfüllung, Baden-Baden; BROOKS,
Privatisation Agency). Furthermore, the
H./LIEBMANN, L./SCHELLING, C.
creation of research and development
(1984), Public Private Partnership – New
Opportunities for Meeting Social Needs,
institutions was and is being promoted,
Cambridge; HOFTMANN, B. (2001), comprising in this instance also non-
Public Private Partnership als Instrument der corporate or tertiary research institu-
kooperativen und sektorübergreifenden Leistungs- tions (such as the Max Planck Society,
bereitstellung, Hamburg. Blue List institutes, the Fraunhofer
Society).
Peter Oberender The speedy modernisation of the
Thomas Rudolf inadequate infrastructure, with particu-
lar emphasis on the areas close to the
economy (such as transport, telecom-
Reconstruction East munications, business parks), was
intended to help the economy catch up.
After German reunification, the main So-called soft location factors, such as
goal was to adjust East German living housing, urban planning and environ-
conditions and opportunities to those mental protection, were part of this
of West Germany as quickly as possible. process. Social and labour policy meas-
This was considered feasible only on ures (such as employment creation,
condition of the establishment of a pro- social plans, early retirement), were
ductive East German economy, which, supposed to make the transition period
however, after the introduction of the easier for the people.
monetary, economic and social union, →The Federal Republic, federal states
initially underwent a dramatic break- and municipalities as well as special funds
down. Until the beginning of 1991, – European Recovery Programme
industrial output shrank by 70%. The (ERP) special assets, the →Treuhand
various measures of the Reconstruction Privatisation Agency, and the German
East programme were therefore aimed Unity Fund (→Redemption Fund for
at reviving the East German economy, Inherited Liabilities) – were used to fund
not least in order to prevent a threaten- this assistance.
374 Reconstruction East
Financial grants and subsidised investment volumes in Germany, 1990–1998
Tax revenue from the federal gov- (GDP) for East Germany including
ernment, federal states and municipali- Berlin was expected to increase from
ties, as well as income from social secu- slightly more than 49% in 1991 to
rity contributions (pension and unem- approximately two-thirds of the West
ployment insurance) in East Germany, German level. This convergence, how-
were of course insufficient to fund the ever, is the result of a passive rehabilita-
reconstruction in the East and its social tion, partly due to considerable losses of
alignment. This made transfers from population during the period of time
West Germany necessary. These fluctu- examined (–5.4%).
ated between s77 billion and s97 bil- The infrastructure is assumed to
lion a year, depending on which pay- have reached two-thirds of the Western
ments were included and how they level by now. The adjustment of
were calculated in each case income levels has continued. While in
(Heilemann/ Rappen 2000, p. 12ff.). 1991 monthly wages and salaries before
These transfers were largely allocated to tax averaged only 48% of those of their
social alignment, in particular compen- West German counterparts, by 1998
sating the East German deficits in they had already gone up to 78%. If tax
unemployment, health and long-term payments made by, and transfer pay-
pension schemes, but also to the fund- ments received by, each household are
ing of public services in East Germany. included in the calculations, then East
The Reconstruction East pro- German households have reached 87%
gramme was quite successful, provided of the Western level. In 2002 the remu-
that the unrealistic initial expectations neration of employees amounted to
are not used as a benchmark. On paper, 81.5% of the Western level.
per capita gross domestic product Despite these remarkable successes,
it must be stressed that East Germany is Gesamtwirtschaftliche und unternehmerische

still a long way from full socio-eco- Anpassungsfortschritte in Ostdeutschland, Berlin,
nomic parity with West Germany. It is Halle, Kiel; HEILEMANNN, U./RAP-
PEN, H. (2000), ‘Aufbau Ost’ –
expected that this will take at least a fur-
Zwischanbilanz und Perspektiven, Hamburger
ther generation.
Jahrbücher für Wirtschafts- und Gesellschafts-
This accounts for the decision to politik, 45, pp. 9-39.
continue the solidarity pact, which con-
tains two elements or rather baskets, in Ullrich Heilemann
place post-2005. The Supplementary Hermann Rappen
Federal Grants for Special Require-
ments (SoBEZ) comes out of what has
been designated as Basket I and is tar-
geted at upgrading East Germany’s pre- Redemption Fund for Inherited
viously inferior infrastructure, as well as Liabilities
giving the proportionally under-funded
East German municipalities a financial The assumption of existing and new
boost. This will be for a limited term debts as a consequence of the German
only and will decrease over time. The →reunification was largely accomplished
allocations amount to a total of s105 through newly established special assets
billion for the period 2005–2019. of the Federal Republic. The so-called
In Basket II, the federal government Debt Processing Fund took on the
pledges that the East German states, rel- debts of the German Democratic
ative to those in the West, will continue Republic (GDR) national budget from
to receive more than their proportional the time of reunification. Banks and
share in aid for Reconstruction East. A business enterprises were granted com-
total amount of s51 billion has been pensation claims against the Currency
earmarked for this purpose, although it Conversion Equalisation fund in order
has not yet been officially approved. At to adjust their balance sheets. This was
present, Basket II comprises extra pay- necessary since the conversion of assets
ments by the federal government for (demands) and liabilities (commit-
common (joint) tasks of the →Federal ments) from the GDR Mark to the
Republic, federal states and municipalities, Deutsche Mark was not 1:1.
financial aid, money derived from the The banks were granted further
EU Structural Fund, as well as the fed- compensation claims to make amends
eral share in the Investment Bonus for the requisite deductions of claims
East. against →enterprises that were beyond
repair and to increase their own capital
REFERENCES:
funds to 4% of their balance sheet total.
BUNDESMINISTERIUM FÜR The liabilities of the Equalisation of
WIRTSCHAFT UND TECHNOLOGIE
Burdens Fund were equally integrated
(eds.) (1999), Bilanz der Wirtschaftsförderung
into the Debt Processing Fund.
des Bundes in Ostdeutschland bis Ende 1998;
DEUTSCHES INSTITUT FÜR WIRT- Furthermore, the →Treuhandanstalt was
SCHAFTSFORSCHUNG/ INSTITUT established for the →privatisation of
FÜR WELTWIRTSCHAFT (1999), profitable, and the dismantling of non-
376 Redemption Fund for Inherited Liabilities
profitable, enterprises. But the annuities of the German Unity Fund

Treuhandanstalt was unable to offset the up to its dissolution at the end of 2019.
associated expenditure (among other In return, it receives a fixed portion of
things for the assumption of long- value-added tax arising of almost s1.32
standing credits, investment aids and billion. The existing balance of debt at
social plans) with the proceeds of sales the time of its dissolution of up to
(privatisation of enterprises), so that its s6.54 billion is transferred to the
final balance sheet in 1994 showed lia- Federal Republic in its entirety; the
bilities of s105 billion. West German states (including West
In 1995, the Redemption Fund for Berlin) make a 53.3% contribution to
Inherited Liabilities, as a newly created amounts higher than that.
special asset of the Federal Republic, While up to the end of 1994, long-
assumed the liabilities of the Debt standing interest and redemption obli-
Processing Fund and of the Treuhand- gations of the liabilities resulting from
anstalt, but also the standing commit- the reunification were financed by new
ments of East German housing enter- borrowings, the liabilities of the
prises and private landlords. Further- Redemption Fund for Inherited
more, the compensation claims that Liabilities are being systematically
have arisen since 1995, as well as those reduced. From 1995 to 1998, the fund
which are continuing to arise, are also received contributions of s46.7 billion
integrated into the fund. The liabilities from the federal budget (initially annu-
of the fund will probably rise slightly ally 7.5% of the gross liabilities of the
due to further exoneration according to fund) as well as s12.8 billion in Federal
the Accumulated Debt Assistance Act. Bank profits (that part of the Federal
The fund is administered by the Bank profits which exceeded the
Federal Ministry of Finance and the amount of s3.5 billion). In this way it
federal government is responsible for was not only possible to settle the inter-
its liabilities. In this way, in the wake of est due, but also to reduce the existing
reunification, a far-reaching consolida- liabilities by approximately s25.1 bil-
tion of the special assets was achieved. lion.
In the long run, only assets in a special The Redemption Fund for
position were permanently excluded: Inherited Liabilities did not only erase
the Federal Railroads asset, into which debts, but in 1997 it also assumed
the long-standing debts of the National municipal liabilities for the construc-
Railroad (the GDR) and the Federal tion of social facilities. In return, the
Railroads were transferred, as well as new German states pay the federal gov-
the German Unity Fund, whose inter- ernment s143 million a year until the
est and repayment obligations are car- dissolution of the Redemption Fund
ried by the federal government and the for Inherited Liabilities. This corre-
West German states and their munici- sponds to half of the annual annuity for
palities. these long-standing municipal credits.
Starting from 2005, in terms of the In the financial year 1999, the
restructuring of financial equalisation, Redemption Fund for Inherited Lia-
the federal government will assume the bilities was integrated into the federal
budget, meaning that since then Resource protection

redemption and interest payments have
been made in the context of the general If the demand for a product exceeds the
debt service of the federal government supply, the market solves this problem
(→public debt). This also means that the in the short term by pushing prices up;
federal government provides the fol- this in turn attracts additional supplies,
low-up financing for payable liabilities. and prices fall again in the long term.
Further Federal Bank profits and the However, this does not apply to envi-
payments of the East German states are ronmental goods, since the supply is
now exclusively used for the redemp- finite and the price mechanism does not
tion of due liabilities (the so-called work in this case – which is sufficient
redemption contribution of the Fund). justification for the call for a policy for
Beyond that, the Fund receives fur- the protection of natural resources.
ther income, including revenue from But why do we have environmental
the privatisation of housing enterprises, problems at all? To answer this question
which is used to meet expenses in con- from the environmental perspective
nection with the liquidation of foreign one has to look to the competition for
trade enterprises. Excess liquidity of the the utilisation of the environment,
Fund is transferred to the federal budg- which has to function variously as a
et. consumer product, supplier of raw
By the end of 2003, the debts of the materials and absorption medium for
Redemption Fund for Inherited pollutants.
Liabilities amounted to about s33 bil- The exploitation of environmental
lion, compared to the temporary peak resources is always accompanied by
level of debts without redemption of production and consumer processes,
s181.4 billion. By means of the income which inevitably bring unwanted by-
from the 2002 auction of the Universal products in their wake in the form of
Mobile Telecommunications System emissions or waste, followed also by
licenses, an unplanned s34 billion was emissions that are harmful for the envi-
redeemed. The last planned liability of ronment. This is inevitable because,
the Redemption Fund for Inherited despite the theoretical interest in maxi-
Liabilities waits to be redeemed in 2011. mum production efficiency, a total
transformation of inputs into outputs is
REFERENCES: simply not feasible.
DEUTSCHE BUNDESBANK (1997), Die The exploitation of the environ-
Entwicklung der Staatsverschuldung seit der ment is thus an allocation problem of
deutschen Vereinigung, Deutsche Bundesbank
the environment as a natural resource
Monatsbericht, 3 pp. 17-31; BUN-
in terms of its different conflicting
DESMINISTERIUM DER FINANZEN
(2003), Finanzbericht 2004, p. 51 f.
roles. This has turned environmental
exploitation into an economic problem,
Ullrich Heilemann since today the environment has
Hermann Rappen become a scarce resource, and scarce
resources are valuable and have to be
managed efficiently.
378 Resource protection
Why, however, should scarcity – uct which cannot be sold at a certain

from an economic perspective – cause price does not get produced and vice
problems where the environment is versa: if people cause others harm with-
concerned, and why is the market not out having to make amends, they will
able to solve the environmental prob- have no reason to stop their actions (in
lems? quantity or composition). Thus, if
The reason is that environmental actors are held only partly responsible
resources have very specific economic for either the positive or the negative
characteristics: they are not owned by consequences of their actions, no opti-
anyone, since there are no property mum consumption or production will
rights; they do not have a price – and result; if the production manifests neg-
anything free of charge tends to be ative consequences, there have obvi-
over-exploited. But they are also ously been too many activities.
exploited in a socially unregulated man- Precisely this applies to environ-
ner, or according to the law of the jun- mental goods: negative external effects
gle, as it were. of this sort cannot be added up and
Is the economy winning the battle charged, because the exploitation of the
for environmental exploitation today? environment has no price; and there are
The answer is not so simple: people are no prices because environmental goods
characterised by the variety of roles they do not belong to anybody. Even assum-
play, which is why people in their dif- ing that emitters with a high environ-
ferent roles tend to clash (car driver mental awareness wanted to reduce
versus nature lover). But there are also their emissions voluntarily, they would
conflicts within the individual, and this constitute only a small number of the
means that no capitalist villains are sources of emission and the effect
required to take the blame for environ- would be negligible. This is the logic
mental problems; environmental emis- behind the collective attitude, and the
sions are the unwanted by-product of state of the environment does not
legitimate (because they are socially improve. The same would apply if indi-
desired) activities. Why is this not only viduals who have been harmed were to
unpleasant, but a problem? offer payments to the perpetrators for
An economist would reply that the the purpose of reducing emissions. It
coordination of the individual agendas would not be possible to prevent those
in a market economy is based on the who have paid nothing from benefiting
principle that all economically relevant from the improved quality of the envi-
consequences are given a price, because ronment. This is why it makes sense for
a price signals scarcity. This is how, everybody to wait and, if necessary, to
through prices, limited goods are chan- catch a free ride, and this is precisely
nelled to the areas where they can be why nothing happens.
put to best use, which translates into There is thus no such thing as an
maximum need satisfaction for all. automatic campaign for the reversal of
Now, if no prices exist in certain areas the deteriorating state of the environ-
(or if, mistakenly, the price is nil), max- ment, driven by individual people: in a
imum prosperity cannot result. A prod- world of self-interested people the
environment does not stand a chance. Is goods in order to put a stop to the mis-
this correct? Would that not also mean guided exploitation of natural
that the economic regulatory principle, resources. It should also entail penalis-
the →market economy, has to be ques- ing those who are causing negative
tioned? Are environmental problems a external effects (internalisation). In
manifestation of market failure? Yes and principle, all this is undisputed – but
No. differences of opinion exist in terms of
Markets can achieve optimal or sat- the requirement level of environmental
isfying results only if they receive the policy goals (→environmental policy: con-
correct information input. But as long flicting aims), the determination of the
as the exploitation of the environment most suitable policy-making authorities
is free of charge, the message is that this and the instruments that should be
commodity is in abundant supply, with used for its implementation (→environ-
the result that the environment mental policy: actors and →...instruments).
becomes polluted. To prevent this, offi- Concerning the latter, economists
cial intervention is required since the are right to stress the criterion of system
market, on account of the special char- conformity with the market economy:
acteristics of environmental goods, can- we are in need of an environmental pol-
not send out these messages. This rep- icy compatible with the principles of a
resents a challenge for the government market economy, which offers the
and its policies. incentives necessary for the prevention
But the government has done noth- of →environmental impact and harm, and
ing for a long time – a classic case of which motivates people to search for
policy failure. Instead of advocating the environmentally friendly procedures
abolition of the market economy, they and products. This must happen ration-
ought to feed it with the correct eco- ally and efficiently in order to ensure
nomic information and data, since this that the →social market economy is at the
is precisely where the justification and same time also an ecological market
the functions of an environmental poli- economy.
cy must come from. Since only the gov-
ernment and government-authorised REFERENCES:
institutions are entitled to specify ENDRES, A. (2000), Umweltökonomie, 2nd

norms regarding the desirable quality of edition, Stuttgart; FEESS, E. (1998),
Umweltökonomie und Umweltpolitik, 2nd edi-
the environment, environmental policy
tion, Munich; SIEBERT, H. (ed) (1996),
is definitively a task that must be
Elemente einer rationalen Umweltpolitik.
reserved for government (on the legal Expertisen zur umweltpolitischen Neu-
basis of Article 2 of the Basic Law, ‘the orientierung, Tübingen.
right to free personal expression and the
right to life and freedom from bodily Klaus W. Zimmermann
harm’, as well as the principle of the
→social state).
From an economic point of view,
the political task should be the removal
of the zero tariff for environmental
380 Reunification: Monetary, economic and social union
Reunification: Monetary, • conversion of wages at a parity rate of

economic and social union 1:1;
An increasing movement was develop- • the economic area of the GDR

ing in the German Democratic Republic became part of the domestic market
(GDR) in 1989 which led to political of the FRG; and
reunification between the GDR (East
Germany) and the Federal Republic of • Brussels agreed to expand the
Germany (FRG) (West Germany) on 3 European Community to include the
October 1990. The precursor had been GDR without requiring it to join
the monetary, economic and social officially.
union introduced on 1 July 1990,
between two countries that were then The social union was achieved
still formally independent. through a similar transfer – a procedure
The monetary union was accom- that likewise would have been incon-
plished after less than five months, ceivable in any other way. In terms of
since Chancellor Kohl made the offer the law of the FRG, all citizens of the
for the first time on 6 February 1990. GDR were at the same time also citi-
This was the beginning of a process that zens of the FRG as soon as they moved
played itself out with breathtaking to FRG territory – with all the obliga-
speed, putting science, politics and tions and entitlements entailed therein.
administrative bodies to work around The reunification occurred in three
the clock, and producing results that are consecutive stages:
at least proof of the fact that all the insti-
tutions are in possession of a high • economically on 1 July 1990;
degree of expert knowledge.
What happened on 1 July 1990? The • politically through the incorporation
GDR Mark was replaced by the of the GDR into the FRG on 3
Deutsche Mark (DM), the area where October 1990; and
the DM was legal tender was officially
extended by the GDR, and the • definitely with the first joint elections
→German Federal Bank accepted full on 2 December 1990.
responsibility for the monetary policy
in the GDR. Constitutionally, until 3 At the heart of the economic reuni-
October 1990 this monetary union was fication was the Treaty between the
therefore a unique phenomenon in Federal Republic of Germany and the
international law. German Democratic Republic estab-
The economic union was establishing a Monetary, Economic and
lished concurrently with the transfer of Social Union of 18 May 1990 and the
key elements of the →economic order of obligations of its implementation asso-
the FRG to the GDR. For example: ciated with it. From the point of view of
institutional order policy, it is signifi-
• assessment regulations for →enterpris- cant that this was the first time that the
es; →social market economy was legally pro-
Reunification: Monetary, economic and social union 381
nounced as being the economic order • Corporate and personal liabilities –

of the Federal Republic. 2:1.
A crucial issue for the economy was
the question of which exchange rate Material assets depending on age:
should be used for the conversion of
GDR Marks into DM. This decision • Born after 1 July 1976: 2,000 DM at
was made more difficult by the fact that 1:1.
a market-related exchange rate did not
exist between a market and a planned • Born between 2 July 1931 and 1 July
economy. Moreover, in this case the 1976: 4,000 DM at 1:1.
determination of the conversion rate
was not a simple exchange rate decision • Born before 2 July 1931: 6,000 DM at
but one which directly fixed all prices, 1:1.
→incomes, bank deposits, material prop-
erty, the operational assessment of • All savings deposits beyond the limits
industrial plants, the assessment of rou- and cash at 2:1.
ble liabilities and many other things in
DM; while at the same time every citi- • Claims submitted by private persons
zen, public administrative body and from outside the GDR at 3:1.
enterprise received a start-up provision
in DM. The calculation of the initial
In a special report, the Federal Bank amount of central bank money which
suggested a conversion rate of 2 East should be allocated to the GDR econo-
Marks to 1 Deutsche Mark . The feder- my was equally problematical. Nobody
al government changed several points, could foresee how the GDR citizens
finally agreeing on a rate of 1.81:1. would handle the cash, which made it
Especially when it came to converting difficult to determine the circulation
bank savings, the rate was improved on speed of the money. Furthermore, there
social grounds in favour of population was uncertainty about whether the
groups whose members were unlikely same methods should be used to deter-
to be able to partake in the profits and mine the financial needs (potential-
opportunities of the new economic related) and whether it would be possi-
environment. Owing to the high ble to determine the production poten-
unemployment rate among the under- tial (PP) correctly.
60s age group and the fact that pension- The PP reflects the greatest possible
ers in East and West Germany were production capacity of a national econ-
given equal status, pensioners were omy. It is calculated on the basis of the
clearly winners in the reunification. different potentials (workforce, work-
The conversion took place as follows: ing hours, material capital, productivi-
ty), on the assumption that goods or
• Wages, pensions and rental – 1:1. services are produced competitively and
for which buyers can be found in the
• Corporate and personal borrowings – market. There was no problem in
2:1. assessing the workforce, but the materi-
382 Reunification: Monetary, economic and social union
al capital was outdated and difficult to GDR citizens were careful: there was
evaluate, while the productivity was a no consumer intoxication and much of
matter of speculation since data on the this money was saved.
performance potential of the GDR But problems arose nevertheless
economy were contradictory. Above all, because the conversion rate had the
it was unclear how many products were effect of a significant revaluation. To
competitive at all. For the PP, only mar- make matters worse, many GDR prod-
ketable products count. ucts were not competitive in the West,
Assuming that the real potential and due to the economic and political
(labour, capital) of the GDR economy transformations the markets in the
amounted to 30% of the FRG economy, Eastern European countries were
it follows that at a productivity level falling away. The number of collapsed
(FRG = 100) businesses was growing and unemploy-
ment rose rapidly, meaning that initial-
• of 50%, the GDR has a PP of 15%; ly more than two-thirds of all transfers
and from the West to the East were social
• of 30%, the GDR has a PP of 9%. transfers (→solidarity surtax, →Redemp-
tion Fund for Inherited Liabilities). The
The extent to which the conversion economic situation was made more dif-
rates were affected is illustrated in the ficult by a misguided wage policy. The
table below. These uncertainties caused objective of a rapid adjustment of the
an over-supply of DM which, however, rates of pay did not take into account
did not lead to inflation because the the development of productivity. The
Conversion rates based on a non-inflationary DM supply for the GDR

in DM billions (1989)
Actual values Non-inflationary Conversion rates

1989 money supply of the
GDR
GDR-Mark DM in DM Mark against DM

A1 B2 A B
Central Bank money 17,5 146,9 19,5 14,7 0.9:1 1.2:1

M13 146,6 450,6 59,9 45,1 2.4:1 3.3:1
L4 252,0 2,738,3 364,2 273,8 0.7:1 2.0:1
1 Assumption: PP of the GDR = 13.3% of the PP of the FRG

2 Assumption: PP of the GDR = 10.0% of the PP of the FRG
3 Central Bank money plus domestic non-bank sight deposits with financial institutions
4 Sight-, term-, savings deposits, long-term bank deposits and other non-bank deposits with financial insti-
tutions
Sources: Deutsche Bundesbank, Monatsberichte; Jahresbericht der Staatsbank der DDR für 1989 .
Version of Table (Example line M1): Variant A: 13.3% of 450,6 = 59,9; 59,9 would be the non-inflationary
supply; but the available money supply is 146,6; consequently a rate of 2.4 Mark: 1 DM should be adopted.
Reunification: Monetary union through currency conversion 383
unit wage costs rose far beyond the prompted the decision by Federal
level of FRG economy. This reduced Chancellor Helmut Kohl to establish –
competitive ability increased and single-handedly – on 7 February 1990 a
entrenched unemployment and made monetary union between the Federal
enormous social transfers necessary Republic of Germany (FRG) (West
(→Reconstruction East), which put the Germany) and the GDR (East
social union under too much strain. As Germany) due to come into force on 1
a result, more and more enterprises in July 1990, i.e. preceding the political
the new federal states decided after unification of 3 October 1990.
1995 to leave the wage agreements of This monetary union differs in cru-
the collective bargaining scheme and to cial respects from the European
negotiate rates of pay with the works Monetary Union, which came into
councils in terms of what was econom- force on 1 January 1999:
ically possible (→collective agreements).
A key element of the economic • Entering into a monetary union, the
union was the dissolution of the collec- GDR and FRG were then two states
tive combines of the GDR and their with completely different →economic
→privatisation by the →Treuhandanstalt. systems and very disparate perform-
ance capacities. Above all, the GDR
REFERENCES: lacked banking and financial systems
SINN, H.-W./SENSE, G. (1992), Kaltstart, based on market principles. These
2nd edition, Tübingen; SACH- had to be started from scratch imme-
VERSTÄNDIGENRAT Begutachtung der
diately after the monetary union.
gesamtwirtschaftlichen Entwicklung, annual
reports since 1990; WILLGERODT, H.
(1990), Vorteile der wirtschaftlichen Einheit
• Despite these enormous differences,
Deutschlands, Untersuchungen des Instituts für no new currency (such as the euro)
Wirtschaftspolitik an der Universität zu Köln, 84, was created. Instead, the currency
Cologne. area of the more efficient FRG was
simply expanded to include the
Rolf H. Hasse GDR. This meant that the monetary
union could therefore also be
described as a currency conversion in
Reunification: Monetary union the GDR.
through currency conversion
• Since the introduction of the DM
Very soon after the Berlin Wall fell in coincided with an abrupt transition to
November 1989, the people in the the →market economy, it was not easy
German Democratic Republic (GDR) to find the correct conversion ratio.
demanded the introduction of the This, too, was different when the
Deutsche Mark (DM) and the abolition euro was introduced to the
of their own Mark. This was poignant- →European Union. It is true that the
ly expressed in the slogan ‘either the DM and the GDR Mark had a politi-
Deutsche Mark comes to us or we cal clearing rate of 1:1, but there was
come to the Deutsche Mark’. This no foreign exchange market where an
384 Reunification: Monetary union through currency conversion
exchange rate could form. The EU The main topic of discussion during
had long been involved in the inten- the spring of 1990 was the question
sive exchange of goods and a foreign whether wages should be converted at
exchange market, so that it was possi- the rate of 2:1 or 1:1. In the case of the
ble to apply the existing exchange rate former, after the monetary union,
relations to the conversion of the wages in the East would have amount-
national currencies into the euro ed to a sixth of Western wages; in the
(→European Economic and Monetary latter case to approximately a third. It
Union). was not least due to political pressure
that the 1:1 conversion was adopted.
Overall, one can say today that, Looking back, it is clear that the dis-
technically, the German Monetary cussion at the time was far too focused
Union was a great success. The intro- on the conversion rate for wages, leav-
duction of the DM as legal tender and ing aside the question of how the East
the conversion of financial transactions wages would develop after conversion.
went almost without a hitch. Particularly worrying was the fact that
From the economic point of view, even after July 1990 the East German
however, the outcome was less positive. enterprises were still predominantly
The conversion of the existing eco- without private owners, thus putting up
nomic stock was straightforward (the little resistance against excessive wage
cash stock and the financial claims and demands. They were legally integrated
liabilities). Here the conversion was into the →Treuhandanstalt, which was
generally based on a rate of two GDR responsible for loss reconciliation but
Marks to one DM; while a fixed per- which despite its capacity as quasi-
sonal amount of cash of 4,000 GDR owner was never included in collective
Marks could be exchanged at the rate of bargaining on the employers’ side.
1:1. Although after the conversion the This soon led to wage agreements
money supply in the GDR was about that were clearly aimed at the adjust-
50% higher than the level which had ment of Eastern wages to the Western
been recommended in a Federal Bank level but that lay significantly above the
study, no inflationary impulses resulted productivity increase. Thus wage unit
for the area where the DM was legal costs (→business accountancy) exceeded
tender because the largest part was the level in the old states of the Federal
saved and not spent. Republic considerably, and these enter-
The most difficult part of introduc- prises lost any chance of survival against
ing the DM concerned the conversion international →competition.
of the economic flow aggregates, espe- While in the neighbouring transfor-
cially wages. For this purpose, exact mation countries (Poland, Czech
estimations of productivity in the GDR Republic, Hungary) the change of the
would have been required, but this was industrial sector to market conditions
hardly possible considering the general went smoothly, only a few East German
over-estimation of the efficiency of the enterprises succeeded in adapting to
GDR economy and the enormous eco- market conditions, with the result that
nomic transformation. employment levels in the manufactur-
Shadow economy 385
ing industries suffered a lasting and • A creation of value which ought to be

massive collapse. included but which, for different rea-
sons (such as evasion), is not includ-
REFERENCES: ed.
BOFINGER, P. (1997), The German
Monetary Union of 1990 – A Critical The first area belongs to the so-
Assessment: The Impact on Monetary
called self-help economy, while the sec-
Policy, in: Frowen, S./Hölscher, J. (eds), The
ond area represents the so-called
German Monetary Union of 1990 – A Critical
Assessment, London; DEUTSCHE BUN-
underground economy. Self-help activ-
DESBANK (1990a), Modalitäten der ities include neighbourhood assistance,
Währungsumstellung in der Deutschen work around the house and garden,
Demokratischen Republik zum 1. Juli 1990, voluntary free cooperation in private
Monthly report, June 1990; DEUTSCHE relief organisations (such as the fire
BUNDESBANK (1990b), Technische und brigade and accident and emergency
organisatorische Aspekte der Währungsunion mit services) and private social work.
der Deutschen Demokratischen Republik, The activities in the underground
Monthly Report, October 1990. economy include moonlighting, smug-
gling, misrepresentation of →income
Peter Bofinger
and tax havens. This list already shows
that self-help activities are predomi-
nantly legal whereas underground
Shadow economy activities are illegal.
Over the past several decades the
The economy of any country can be shadow economy in Germany and in
divided into two areas: the official (for- nearly all the industrialised nations of
mal) economy and the shadow econo- the world has grown considerably. It is
my (unofficial, informal economy). The estimated that in Germany these repre-
shadow economy covers all economic sent between 15–20% of the officially
activities that represent a creation of calculated national product.
value, but that are reflected neither in What are the reasons for a growing
the macroeconomic balance sheet nor in shadow economy? If the shadow econ-
the officially calculated national product omy is seen as an evasion economy, it
(→circular flow of incomes). Due to the makes sense that the agents of an econ-
shadow economy, therefore, the actual omy escape from the formal into the
creation of economic value is always shadow economy because it is obvious-
greater than it seems. ly worthwhile for them. In so doing,
The unofficial creation of value of they avoid paying taxes, social security
the shadow economy can again be contributions, administration fees and
divided into two areas: the national transfers of the formal
economy. They have moved into the
• An area where the value creation sim- twilight zone that is largely exempt
ply cannot be calculated according to from taxes and contributions.
the criteria of the macroeconomic It follows that generally the shadow
balance sheet. economy thrives and prospers more as
386 Social budget
the tax burden and contributions in the Social budget

regular economy increase. It is safe to
say that a growing shadow economy is The social budget is a German federal
generally an indication that the bond of government report which at certain
trust between citizens and the state is intervals (usually once per parliamen-
disturbed. tary term) gives a detailed account of
Thus, if the state wants to curb the the social services rendered and the
shadow economy it would be unwise to funding of all social security benefits.
go about this by imposing strict prohi- Frequently, this term is used to label the
bitions, controls and punishments for sum of all public social services of a
activities in the shadow economy. time period.
Rather, the state should eliminate the The social budget divides all the
reasons why people migrate to the services rendered in terms of institution
shadow economy – the excessive costs and function, and their funding in
(also in terms of time) of the formal terms of type and source. Institutions
economy caused by excessive taxes and are social agencies subordinate to the
contributions. regional government authorities
In the end, this would mean that the (→Federal Republic, federal states and
state reduces its demands on its citizens. municipalities), or alternatively abstract
As this happens, the citizens would be institutions in charge of social services.
motivated to shift their shadow eco- The social budget is divided into:
nomic activities – at least partially – into general services (funding for →pensions,
the formal sphere. If this can make the →nursing care, →unemployment and
shadow economy shrink the →social →accident insurance, job creation, child
market economy will work more efficient- and educational benefits); special serv-
ly. ices (retirement funds for farmers,
provident funds); service schemes of
REFERENCES: the public service; employers’ services;
NIESSEN, H.-J. (1986), Schattenwirtschaft compensation schemes; and social
– Gefahr oder Chance für die soziale assistance and services. These services
Marktwirtschaft ?, in: Weigelt, K. (ed),
are collectively known as direct servic-
Vorträge und Beiträge der Politischen Akademie
es.
der Konrad-Adenauer-Stiftung e.V. Part 2,
Alfter-Oedekoven; SCHÄFER, W. (ed)
Then there are the indirect services,
(1984), Schattenökonomie, Göttingen; which include tax measures such as the
SCHNEIDER, F./OSTERKAMP, R. splitting of taxable income for spouses,
(2000), Schattenwirtschaft in Europa in: Ifo and family expenditure compensation
– Institut für Wirtschaftsforschung (ed), Ifo- such as indirect benefits (child benefit
Schnelldienst, 53(30), pp.17-26. or child allowances).
‘Functions’ are the various social
Wolf Schäfer facts (risks or needs) associated with
potential claims to social services. Here,
the social budget differentiates the fol-
lowing functions: marriage and family,
health, →employment, age, surviving
Social budget 387
Main areas of social expenditure in Germany listed by sector, 2006
dependants and other functions (such 1990 (27.8%) and 1996 (32.1%). From
as housing, accumulation of wealth, the 1975 to 1989, the social security benefit
consequences of political events and ratio started to decline slightly.
general life assistance). The main areas of expenditure listed
Funding methods include the social by sector are: pension insurance, which
insurance contributions of the insured attracts the bulk of total social expendi-
and the employers, the assignment of ture; health insurance; job creation
public means and other revenue such as schemes; employers’ funds; and public
capital returns, and settlements by the service funds (see figure).
institutions among themselves. The most difficult problem of social
Ever since the Federal Republic of reporting is the fact that the social
Germany came into being, the social budget does not accurately represent
services have made enormous progress. either the social services or the financial
Social security benefits have gone up in commitments of the private economic
real terms from s32.6 billion (1960) to agents.
s700.2 billion (2001); in the same peri- The social budget includes only the
od, the per capita social security bene- social services associated with transfer
fits have increased from s588 to s8,500 payments or shortfalls in tax revenues,
– or more than the rate of economic which means that the government’s
performance in Germany during the social policy and policy regarding the
same period. As a result, the social secu- institutional order are not reflected
rity benefit ratio, which equals the pro- (these include protection against unfair
portion of social security benefits to the dismissal, the right to →co-determination
GDP, went up from 21.1% (1960) to and the general regulations of the social
30.3% (2006). rent law).
The most significant increases to Moreover, the definition of services
the social security benefit ratio were included in the social budget is made
registered between 1965 (22.5%) and case-by-case, with the result that certain
1975 (31.6%) and again in the course of services covered by the social budget
the German reunification between are not, according to generally accepted
388 Social budget
fiscal principles, classified as social to benefits arise today but have to be

security benefits: examples are child fulfilled only at a later stage. In order to
allowances and the splitting of income obtain a comprehensive understanding
for the taxation of spouses. On the of the flow of services and funds within
other hand, services which clearly fall the government’s social policy, an inter-
into the category of social services, such temporal calculation along the lines of
as those of the Federal Law on generational accounting (= transmis-
Education and Training Promotion, are sion of liabilities between the genera-
not included. tions) would be required.
Furthermore, the social budget does
not differentiate between services REFERENCES:
intended as insurance benefits or as LAMPERT, H./ALTHAMMER, J. (2004),

redistribution measures. Finally, the Lehrbuch der Sozialpolitik, 7th edition, Berlin
et al.; BUNDESMINISTERIUM FÜR
social budget reflects only the social
GESUNDHEIT UND SOZIALE
services of the current period.
SICHERUNG (ed), Sozialbudget 2001,
A large number of these social inter- Berlin.
ventions merely lead to a temporary
shifting of purchasing power, i.e. claims Jörg Althammer
German social budget, 1991–2006

in s million
1991 2000 2006 % change

(estimated) 1991-2006
Pension schemes 133,326 217,431 239,963 80

Health insurance scheme 92,674 132,044 146,830 58
Nursing care insurance – 16,667 18,040 –
Accident insurance 7,640 10,835 11,181 46
Employment subsidies 44,599 64,767 83,242 87
Retirement subsidies for farmers 3,568 5,230 6,746 89
Pensions and grants for civil servants 34,513 49,063 49,829 44
Continued payment of wages, company
Pensions 47,081 53,585 56,509 20
Social compensation, etc. 8,736 6,536 4,266 –51
Social grants 18,103 25,867 21,921 21
Youth subsidies 10,900 17,242 19,001 74
Children’s allowance and family
Tax-relief package 10,435 31,755 36,943 254
Child-raising allowance 3,232 3,732 3,055 –5
Educational grant 1,326 917 1,842 39
Accommodation grants 2,527 4,309 1,681 –33
Social tax benefits 27,948 40,077 36,404 30
Total (nominal terms) 446,608 680,057 737,453 65
Source: Federal Ministry of Labour and Social Affairs

Social capital 389
Social capital theless indispensable in a market econ-

omy.
Successful markets do not develop The concept of the social market
automatically. A →market economy is a economy thus takes into account the
product of civilisation rather than a nat- →societal foundation of economic orders,
ural phenomenon. There are two rea- which tend to be overlooked due to the
sons for this. The first is that a market sociological blindness (William
economy requires a legal framework – →Röpke) of economics (→market mech-
an economic constitution with institu- anism, →social market economy: concept of
tions and legal regulations (formal man). In this regard, it must not be
institutions/rules). forgotten that the fathers of the social
In addition, a market system market economy named their revised
depends on non-legal ties and rules of version of →liberalism, ‘sociological
conduct between individuals which are neo-liberalism’.
based on trust and on which one can More recently, the institutional
rely (informal institutions/habitual pro- framework of market economies has
cedures). been examined in the light of →institu-
One might imagine circumstances tional economics, which looks mainly at
where breaches of contract and of con- formal institutions of law. Informal
fidence are the order of the day and institutions have more recently been
where the norms of the economic con- considered in the context of a term that
stitution and of human conduct can be originally comes from sociology (and
enforced only after the expenditure of political science) – ‘social capital’.
large amounts of money and nervous From the economic point of view,
energy (transaction costs). Without the the term social capital suggests that one
weak ties, the strong ties of the law is dealing with a factor of production
quickly become inadequate. (→production and supply), such as the
The concept of the →social market kind required for the creation of valu-
economy has always emphasised the need able products. One has to invest in this
for formal and informal ties. The ordo- capital in order to develop capital stock
economic insight that market econo- for ongoing production, and re-invest-
mies cannot be considered in an institu- ments are necessary in order to make
tional vacuum relates to both these ties, up for the continual depreciation of the
and this explains the emphasis on the capital stock. However, this general
economic institutional order as a cre- description has not answered the fol-
ative legislative accomplishment (Franz lowing questions:
→Böhm) that has to be shaped in detail
according to the insights of institution- • How is the capital stock formed?
al order theory.
Beyond that, the significance of his- • What does the capital stock actually
torical ties (Alfred →Müller-Armack) has consist of?
been highlighted. These function only
informally and are based on mutual • How should the ‘valuable’ products
personal agreement, but they are never- be defined?
390 Social capital
The first two questions can be Due to its significance for a success-
answered in two ways. On the one ful economic and political system,
hand, the term social capital can be used social capital plays an important role in
to fill the gap between the individual developmental and transformational
and society, between the economic economics and also in the political
agents and the national economy. In agendas of →international organisations,
this case, the value of relationship net- particularly the World Bank.
works is paramount; these form the Lastly, we therefore need to consid-
social glue that holds a society together. er the economic policy conclusions that
Social capital investments are possible can be drawn from the ongoing debate
only in the context of such networks. on social capital: the economic policy of
Apart from this structural aspect, a free market system has to recognise
one can also ask what social capital con- that the policy cannot directly produce
sists of. Viewed from this angle, trust is prosperity. An economic policy can
the most important element. Here the create the conditions for prosperity
crucial point is that trust develops in only by providing the institutional
social networks but is not limited to its framework. But on examining the con-
members. Social capital is universal cept of social capital more closely, one
trust, or the general expectation of all finds that some of these conditions can-
that they will not be exploited when not be produced directly by the state
engaging in cooperative relationships. either. This in some way contradicts the
This also makes it possible to optimism of some of the fathers of the
answer the third question. Social capital social market economy who relied on
makes possible the realisation of the their assumption that the right sort of
sorts of gains from cooperation that a social policy would co-create the neces-
free market economy is looking for. sary social glue.
Anonymous relationships in the mar-
ket, the division of labour and even REFERENCES:
trade relationships between strangers DASGUPTA, P./SERAGEL DIN, I. (ed)

become possible thanks to universal (1999), Social Capital: A Multifaceted
Perspective, Washington, DC.; PUTNAM, R.
trust – without having to consult the
D (ed) (2001), Gesellschaft und Gemeinsinn:
law books every time or having to write
Sozialkapital im internationalen Vergleich,
out voluminous contracts. Gütersloh; — (1993), Making Democracy
However, the effect of social capital Work, Princeton; COLEMAN, J. (1991ff.),
is not restricted to the economic sys- Grundlagen der Sozialtheorie, 1-3, Munich.
tem. In terms of describing social capi-
tal through social networks, the impor- Stefan Okruch
tance of voluntary organisations for the
pursuit of a great variety of common
goals has to be stressed. Such voluntary
organisations and the social capital they Social justice (social balancing)
accumulate are regarded as a condition
of a successful democratic system (civil Besides freedom, justice represents one
society). of the highest basic values in socially
responsible and democratic social sys- to participate in its creation, growth and
tems. Like all basic values, social justice preservation.
is a superior social objective. Social jus- In terms of the social market econo-
tice as a moral value has a profound my, the practical performance of social
effect on the social life of humans and justice should not be based on a one-
on their fundamental attitudes. sided understanding of justice, but
In the context of the →social market must be aimed at achieving a balanced
economy, basic values play two different relationship between all the different
roles. The first is associated with the kinds of justice. Any undesirable conse-
fact that they are rooted in the shared quences for the society as a whole
cultural heritage of a society that ought to be avoided. If social justice as a
includes the economy as an aspect (sub- general principle is firmly rooted, the
system) of society (→societal foundation of great variety of indicators for justice
economic orders). must be taken into account.
Second, basic values are a part of the Contemporary ethics does not place
institutional order regulating economy. the different criteria side by side, nor are
This was strongly emphasised by Alfred they pitted against one another, but spe-
→Müller-Armack, but it was equally cial emphasis is put on their mutual
important to Alexander →Rüstow and inter-penetration. Applied to the econo-
William →Röpke, two of the major rep- my, the connection is made to the tri-
resentatives of the social humanism partite nature of the concept of justice as
movement. These founders of the Aristotle and Thomas Aquinas defined
social market economy postulated it. Apart from the superior, general jus-
social justice manifested in private tice that focuses on the common good
property for as many people as possible, (iustitia legalis), the commutative justice
and a humane way of life for every citi- or justice of exchange (iustitia commutati-
zen. Their focus was the quality of va) and the justice of distribution (iusti-
human existence. tia distributiva) need to be mentioned.
The special significance and worth It is worth noting that the different
of social justice is based on the concepts of justice are not dealt with in
acknowledgment of a specific concept isolation, but that their theoretical
of man. On the one hand, man is seen interpretation illustrates their mutual
(in the tradition of Aristotle) as a social inter-connectedness. In economic
creature (zoon politikon), and, on the ethics, concepts of justice which belong
other (in deference to the principle of together are paired and placed opposite
economic reason) is depicted as a self- each other (see box, next page). In terms
interested, economically active individ- of content, these pairs partially overlap.
ual eager to maximise utility. One of the fundamental postulates
Social justice is compatible with enshrined in the policy of a socially
humane principles and the pursuit of responsible market economy is the
the common good. According to these objective of a fair remuneration and
principles, all members of a society are property accumulation policy. In a mar-
supposed to benefit from the prosperity ket economy, fair exchange is a measure
of the society, just as they are supposed of just →distribution, which correlates
392 Social justice (social balancing)
Correlated types of justice
Term Correlated term
• Justice of Achievements • Justice of Needs

• Justice of Opportunities • Justice of Outcome
• Reciprocal Justice • Commutative Justice
• Justice of Exchange • Compensating Justice
• Justice in Markets • Justice by Politics
with the →achievement principle. bring about social coherence. It is

Assuming that in a market, equivalent hoped that this can, on one hand, pre-
values are exchanged, neither of the vent great social contrasts and that, on
parties to the exchange loses out and the the other hand, it will ensure social har-
coordination of activities in a market mony (→social irenics) in the interest of
economy is fair. One of the positive economic prosperity.
effects of fairness is that it acts as an Essentially, social balance is
incentive to a continually improved achieved through government redistri-
performance. Justice of performance bution policies. The necessary means
has to be complemented by justice of for this are funded by →public revenue,
needs, since there are members of soci- which is in turn largely made up of the
ety who, due to their personal circum- tax money provided by the society’s top
stances, do not perform successfully. In performers. Since this is the manner in
order for them to be able to enjoy a cer- which the state enforces solidarity by
tain minimum standard of living, col- the strong with the weak, one has to
lective consensus must bring about the make sure that the policies of social
required redistribution of material redistribution are sensitive, moderate
means, rights and opportunities. and efficient, in order that they are not
Apart from the consideration of the counter-productive. The demand for
justice of needs, a degree of social bal- social justice will remain controversial
ance is also necessary because justice of as long as ideals of justice remain split,
exchange in the markets is not always inconsistent and complex, and without
guaranteed, i.e. if prices do not really a universal social consensus.
signal scarcity or if the achievement
principle is not based on equal opportu- REFERENCES:
nities. The justice of performance (the FÖSTE, W./JANSSEN, P. (1999), Die
option for the fittest) must be counter- Konsensfähigkeit der Sozialen Marktwirtschaft,
balanced by the justice of compensation Frankfurt M., New York; HÖFFE, O.
(1995), Die Nikomachische Ethik, Berlin;
(the option for the weak), because last-
VOGT, M. (1999), Soziale Interaktion und
ing economic progress and growth can-
Gerechtigkeit, in: Handbuch der
not be achieved in the face of situations Wirtschaftsethik, Gütersloh, 1, pp. 284-309.
of drastic social imbalance. It can rather
be reasonably expected that social bal- Friedrun Quaas
ance will liberate economic forces. This
means that social justice is supposed to
Social market economy: An introduction 393
Social market economy: not only introduced the term social mar-
An introduction ket economy into the public debate but
also made a significant contribution
Strictly speaking, the term social market towards the creation of the associated
economy refers to the economic con- theoretical concept by representing the
cept which has formed the basis of the idea of the social market economy in
West German economic policy since contradistinction to the centrally con-
1948. In a broader sense, the term social trolled economy of national socialism,
market economy defines the →economic and also contrasting it with all other
policy of the Federal Republic of familiar →types of market economy.
Germany (FRG) in respect of form and Apart from Müller-Armack, it is
content. above all the representatives of the
In the process of German →reunifi- Freiburg school who paved the way for
cation, the Treaty between the Federal the social market economy, especially
Republic of Germany and the German Walter →Eucken, Leonhard →Miksch
Democratic Republic establishing a and Franz →Böhm as well as Wilhelm
Monetary, Economic and Social Union, →Röpke and Alexander →Rüstow as
of 8 May 1990, formally declared the representatives of economic and social
social market economy the common humanism, as it was then called. The
economic order of both contracting intellectual resistance to the national
parties. Its content describes the eco- socialist system by the Freiburg circle
nomic order behind the social market (Erwin von →Beckerath, Constantin von
economy as characterised by the specif- →Dietze) and the Kreisau circle result-
ic features ‘private property, competi- ed in important preliminary thoughts
tion, free price formation and generally on the structure of post-war Germany.
total freedom of movement in terms of Here, people of extremely different
work, capital and services’ (Article 1(3) world views, background and education
of the treaty of reunification). The came together to engage in dialogue. It
social order that best complements the was Ludwig →Erhard, who, having
social market economy is characterised been instrumental in the outcome of
by ‘a labour market order which is the economic and monetary reforms of
compatible with the social market 1948, went on to tackle the practical
economy and a comprehensive system economic implementation of the con-
of social security services based on the cept of a socially orientated economy,
principles of justice of achievement and only to take it further when he became
social compensation [balancing]’ Minister of Economic Affairs and, later,
(Article 1(4)). Federal Chancellor. Erhard is generally
This legal definition of a →market hailed by the public as the great practi-
economy based on social principles, which tioner and father of the social market
also serves as a basic model of society, economy.
remains profoundly influenced by the For Müller-Armack, the economic
views of Alfred →Müller-Armack. In his concept of the social market economy
1946 book on economic administration was open and had to do with a certain
and market economy, Müller-Armack style rather than a closed theory. This
394 Social market economy: An introduction
ensures that necessary adjustments of ly important not to put too much strain
the concept to changing social condi- on one side while neglecting the other.
tions are definitely possible. Secondly, it Secondly, a social market economy can-
has become obvious that the dynamics not be interpreted as a mere compro-
of the economic style of the social mar- mise between liberty and social justice,
ket economy virtually make openness with one of them continually having
to social change a necessity. Yet concep- the upper hand. Rather, both values
tual adjustments and variations have to stand in a complementary relationship
be introduced in such a way that the to each other. Liberty and justice are
basic idea of the concept is not harmed frequently portrayed as conflicting val-
and does not lose its meaning. Müller- ues that can be resolved in a manner
Armack expressed this basic idea of the which Müller-Armack referred to as
concept of the social market economy dialectic.
in an abstract, generalised and abbrevi- If we accept that freedom and jus-
ated formula. During political transfor- tice include security and human digni-
mation, the content of this formula has ty, then the concept of the social market
to be translated into practice under con- economy has an integrating force capa-
sideration of the prevailing social ble of combining the different world
conditions (→social market economy: polit- views in the spirit of the conciliatory
ical implementation). movement of →social irenics. This makes
According to Müller-Armack, the the concept of the social market econo-
‘point of the social market economy’ is my potentially appropriate for an inter-
‘to combine the principle of a free mar- national economic system – for exam-
ket with that of social balancing’. This ple as the →social market economy in the
formula makes it possible to estimate to EU.
what extent theoretical progress and Looking at the practical results of
practical policy results are still compati- the social market economy in Germany
ble with the original concept of the over time, different phases can be dis-
social market economy. The idealised tinguished which are characterised by
concept of human liberty that is com- the degree of their compatibility with
plemented by →social justice serves as the the theoretical model. Müller-Armack
frame of reference. The theoretical and himself already mentioned a second
historical sources of the social market phase of the social market economy,
economy therefore include both socie- when in 1960 in the course of a critical
ty-oriented theories of →liberalism with examination of what had been achieved,
their underlying idea of freedom, as he suggested that the social market
well as ethically orientated social economy should be complemented by a
philosophies which provide a basic new society-oriented policy model
understanding of social justice. bearing in mind the principles of eco-
In this interpretation of the social nomic systems emanating from society
market economy, the basic social values generally, and from the social market
of liberty and justice represent two sides economy in particular.
of a relationship whose tension has to At present, the following timeline
be maintained and tolerated. It is clear- has found acceptance in the literature.
After the initial difficulties had been to the change in government in 1982,
overcome, the first phase (1948–1966) the economic policy became more
was characterised by the initially focused on the stimulation of market
extremely successful realisation of the processes, but on the whole this phase
principles and style elements of the was characterised by stagnation in terms
social market economy. The so-called of →institutional order policy and the con-
economic miracle of the 1950s, which sequent backlog of reforms.
led to the fundamental technological The reunification of the two
modernisation of the production German states marked the beginning of
processes and the rapidly rising stan- the fourth phase (since 1990). The
dard of living of the population of West institutional reforms of economic order
Germany, are considered as proof for deemed necessary have increasingly
this. The American support in the form been supplemented by demands for a
of the Marshall Plan was helpful in this changed →welfare state and for a
development, as were: changed →social policy. One of the pri-
orities here is the re-establishment of a
• the availability of a large potential balance between the economic and the
workforce for the full utilisation of social dimension. These positions pre-
the production capacities; vail in the current theoretical discussion
on this topic. They demand a return
• the absence of any particular setbacks both to the roots and to the renewal of
in terms of business cycles; and the social market economy.
• a stable domestic situation. REFERENCES:

MÜLLER-ARMACK, A. (1976), Wirtschafts-
Starting in 1957, a gradual ‘style- ordnung und Wirtschaftspolitik. Studien zur
Sozialen Marktwirtschaft und zur Europäischen
decay’ set in, which manifested in a
Integration, Bern, Stuttgart, Vienna; QUAAS,
slow-down of economic →growth,
F. (2000), Soziale Marktwirtschaft. Wirklichkeit
→conflicting aims in economic policy, dis- und Verfremdung eines Konzepts, Bern, Stuttgart,
putes regarding distribution and a grad- Vienna; TUCHTFELDT, E. (1995), Soziale
ual hardening of the social climate. The Marktwirtschaft als ordnungspolitisches
second phase (1967–1978) was domi- Konzept, in: Quaas, F./ Straubhaar, T. (ed),
nated by a policy of demand manage- Perspektiven der Sozialen Marktwirtschaft, Bern,
ment along the lines of →Keynesianism Stuttgart, Vienna, pp. 29-46.
and →interventionism. This entailed
increasing restrictions of free markets Friedrun Quaas
and the violation of market principles in
the rooting principle of economic liber-
ty, as well as in the criterion demanding Social market economy: Concept
the market conformity of economic of man
policy measures by the state. The third
phase (1979–1989 or 1990) started off The concept of man is today both a
with the failure of the policy of demand cause for conflicting personal opinions
management. It is true that subsequent and a hotly contested political debate.
396 Social market economy: Concept of man
The concept of man is the benchmark ed crimes and the expulsion of people
for the expansion of any form of human from their countries in the Balkans,
existence on earth; without it, a judg- human rights violations have become
ment on the worst excesses of contempt punishable crimes that can be prosecut-
for human beings – such as those pered anywhere in the world. This has
petrated by certain 20th century ideolo- made international law much more
gies – would be impossible. effective, and is an encouraging indica-
Communism divided people and tion of the growing solidarity between
society into classes depending on value people for the protection of basic
judgments. The Soviet Union (from human rights, even including illegiti-
1917) and its satellite states (including mate regimes and dictatorships.
the German Democratic Republic After the Second World War, ‘with
[GDR] between 1949 and 1989) sacri- responsibility before God’, the German
ficed millions of human lives and entire people gave themselves a new national,
families to this belief. political and social order in the form of
For national socialism, race had the Basic Law. Article 1 solemnly
more importance than man; this delu- declares that human dignity is invio-
sion prompted the persecution of lable. Having learned from the wrongs
whole peoples, especially the Jewish of an ideology which elevated one man
people, even to physical destruction. over another, with all the terrible conse-
But the national socialist ideology did quences that had occurred during the
not even respect the members of its Nazi period, the conviction that the
own people (‘you are nothing, your dignity of every man is sacrosanct (inde-
people is everything’) with the conse- pendent of race, religion, sex or disabil-
quence that the basis of existence of a ity) since any violation of this principle
large proportion of the German people leads to barbarity, was enshrined in the
was wiped out in the Second World constitution. Looked at from that per-
War. spective, there is no ‘life unfit for life’
Both ideologies had their own defi- and every human being is under the
nitions of ‘life unfit for life’, and as a protection of the state. In terms of
result felt authorised to destroy it. Both Article 79(3), the fundamental rights
caused the largest refugee movements according to Articles 1-20 of the Basic
and crimes of expulsion in the history Law are unalterable.
of mankind, at the same time causing On the basis of the natural law, the
the most devastating cultural losses in American Declaration of Independence
Europe ever. (1776) had already stressed that human
Subsequent to this devastating beings are given dignity and rights ‘by
catastrophe, the United Nations Uni- their creator’, together with the human
versal Declaration of Human Rights nature created by God, as it were. This
(1948) was the attempt by the interna- view rests on the story of creation in the
tional community to take a stance. And Bible, in Genesis 1.27. It says: ‘God
since the establishment of the Inter- created man in His own image; in His
national Criminal Tribunal in The own image He created him; as man and
Hague, set up in response to war-relat- woman he created them.’
No matter whether the biblical con- as much in education and training as

cept of the God-likeness of man is in the economy and working life.
adhered to or whether one subscribes to Representatives of a collectivist or
a humanist concept of man (natural socialist view of man deduce from
law), human dignity means that ‘man is these findings that it is their ethical
more than he knows about himself.’ duty to provide more equality. This is
(Ernst Benda). This imposes limita- a legitimate political request, as long
tions that are not eliminated by the fact as there is consensus that there can
that the perfection of human dignity never be complete equality and as
shows a contrast with the imperfection long as the effort to bring about equal-
of the earthly human state of existence. ity does not cross the line beyond
No human being can overcome this which this turns into coercion and the
dialectical relationship; they have to put violation of human dignity.
up with it. Today, this is particularly rel-
evant regarding scientific research and • Human beings have different inter-
its application to human beings in the ests, ideas and opinions. This has the
areas of bio and genetic engineering, as consequence that they pursue differ-
well as at the existential extremes of ent goals in different ways and that,
man at the beginning and end of his above all, they interpret the meaning
life. of life very differently. Identical or
Another facet of the respect for comparable life situations are there-
human dignity is that man must be fore often assessed by different stan-
accepted as he is. Only on this basis can dards, whereas different situations are
he be free and can he be held responsi- frequently judged equally, if one uses
ble for his actions. He who wants to subjective satisfaction, hope or happi-
save human beings from their imper- ness as yardsticks. Representatives of
fections by trying to change them an individualist, utilitarian (aligned
according to external criteria, or by pre- along pure utility) or hedonistic (per-
scribing their mission in life, robs them sonal attainment of pleasure) concept
of the natural gifts of freedom and of man often derive their demands
responsibility, makes them dependent for personal happiness from this.
and immature, and robs them of their This is permissible as long as the
deepest life motivations. But he who social responsibility for one’s fellow
accepts others as they are will find that men is also sufficiently accepted.
everybody is different. Inequality is a Otherwise, unrestricted liberty can
human constant. It enriches human mean coercion and the violation of
life; only ideologues are bothered by it. human dignity for others.
Two examples can prove this.
These examples show that one-
• Human beings have different gifts sided concepts of man can cause prob-
and abilities and they also do not have lems and can even lead to dangerous
them to the same degree. This is why situations. For this reason, the equally
the same or a comparable effort will personal and socially orientated concept
not yield the same result. This applies of man, which is compatible with the
398 Social market economy: In the EU
Christian and also with the secular Factors of crucial importance to

humanist tradition, is the best way of man and his actions are the legal and
drawing up responsible policies and the political order and the order of the
avoiding mistakes. However, these economy and society (→social market
examples also clarify the limitations of economy). In their own right, these con-
any policy of social equality. tribute to the development and protec-
What is the most universally accept- tion of the concept of man. At the same
able interpretation of →social justice as a time, it becomes obvious how impor-
social policy goal? It is respecting tant it is that these social sub-systems
human dignity as it is enshrined in the are compatible with one another and
Basic Law? complement one another (interde-
‘Factual constraints’ are often pendence of institutional orders).
brought up in this debate. One talks
about mechanisms (price mechanism), REFERENCES:
automation (= job losses) and inevi- THIELICKE, H. (1976), Mensch sein –

tability (such as resulting from →global- Mensch werden, Entwurf einer christlichen
Anthropologies, Munich, Zurich; GRE-
isation), which one needs to follow or
SHAKE, G./ VOSSENKUHL, W. (1995),
which one must follow without expos-
Mensch, in: Staatslexikon, 3, pp. 1094-1104,
ing oneself to the necessity of an ethical Freiburg i. Br.
and consequently also a political deci-
sion. Klaus Weigelt
The above-mentioned factual or
practical constraints are a mistake or at
best a propaganda trick in the daily
political battle. Only nature has its own Social market economy: In the EU
autonomous laws; these are laws we
have to obey if we do not want to fail. On 1 January 2002 the euro was intro-
‘Autonomous laws’ in the economy, duced in the form of notes and coins in
society and in politics never work only 12 of the member countries of the
objectively, dealing with specific issues, European Union (EU). This was a his-
‘but they also have a subjective side toric event: for the first time in 1,500
where they affect the emotions and years, the same coins are accepted from
direct the will’ (Helmut →Thielicke). the Mediterranean to the Baltic Sea.
This means that the goal of social Within Europe, the development
justice has to be intimately linked to an towards the European currency took
objective based on human dignity and place gradually. The conclusion of the
the constitutional concept of man. This Treaty of Rome (1957) first saw the
goal is only realistic as a result of the creation of a customs union with a
complex interactions of human beings common customs tariff, followed by
in the context of an institutional order the single European market, charac-
in constant need of improvement. terised by the removal of the border
Achieving this goal through human controls between the member coun-
intervention is possible only indirectly tries. Now a common European home
and to a very limited extent. market is emerging with a common
currency and a European Central Bank. Declaration demanded that the concept
This is probably the most powerful of the social market economy ought to
form of economic →integration of sover- be made the model for economic poli-
eign states in economic history cies and be enshrined in the Union
(→European Economic and Monetary Agreement as such.
Union). At the same time, we are going Once a year, the European Parlia-
through an accelerated process of ment convenes in order to discuss eco-
→globalisation and making strides nomic policy guidelines. Following the
towards a knowledge society, which is statement by the European Parliament,
becoming a reality through new forms these are then adopted in June, on the
of communication and information. recommendation by the EU Com-
Europeans are now facing the task mission and the Council (→EU: organs
of having to formulate common eco- and institutions). This prompted the sub-
nomic policy principles for the member mission of the Wogau report (2001),
countries of the monetary union. Each which demands that the social market
country has very different traditions. economy should become the economic
There is, for example, the French sys- policy model for the EU. The declared
tem, which has strong elements of a principles of the social market economy
centrally managed economy. Then are freedom and democracy, →competi-
there is the Anglo-American version of tion, monetary stability, the subsidiarity
the →market economy, which was put principle, private property and solidarity.
into effect by Margaret Thatcher in In his book Capitalisme contre
England almost to perfection. Finally, Capitalisme, Michel Albert describes the
there is the German tradition of the economic system of Germany which
social market economy of Ludwig tends to be associated with the social
→Erhard, which is based on the model market economy as ‘Rhineland capital-
of Walter →Eucken and Alfred →Müller- ism’. This is a definite misunderstand-
Armack with a specific institutional ing. The central control mechanism of
order. The dissemination of these ideas a market economy is not capital, but the
was made especially difficult by the fact market. Furthermore, a coherent regu-
that their books have hardly been pub- latory framework regarding social, envi-
lished in other languages. ronmental and competition-related
The European Parliament made issues is required.
efforts early on to secure expert advice. Then there is also the school of
The establishment of the Brussels ini- thought that condemns markets and
tiative did just that (1994). It comprised competition outright. In this view, the
a group of professors, business people market needs a social rescue service to
and politicians, who made it their aim salvage the victims of this ‘evil’ compe-
to work out a suitable economic policy tition. The ongoing discussion in the
for the EU. Their fundamental ideas European Parliament is intended to
are contained in the Prague Declaration lead to the insight that the market itself
of the →social market economy (2000). is, provided it plays by clearly defined
Then there was an initiative by German rules, capable of producing social
and Polish bishops, who in the Külz results.
400 Social market economy: In the EU
A prominent principle of the social →growth and →employment. By contrast,

market economy is competition. There the majority of the members of the
is an ongoing debate in the institutions Peoples’ Party and the Liberals felt that
in Brussels on the relationship between price stability must be the primary goal.
competition in free and open markets In their view, the Central Bank should
and the idea of the state, the municipal- pursue the other goals that have been
ity and free social welfare organisations mentioned only if price stability is not
as providers. If the market is just as put at risk.
capable of providing for the people as There are two reasons for this
the alternatives that have been men- strong emphasis on →price level stability.
tioned, it should be given a chance. The first is that inflation has the great-
Competition in free and open mar- est impact on people who have to live
kets was also the basis of the economic on small, fixed →incomes. They have no
system of Ludwig →Erhard. However, way of evading the effect of inflation.
during his terms as Minister of For them, inflation is nothing but cold
Economic Affairs and Federal Chan- expropriation.
cellor, the telecommunication, power The pursuit of price stability is
and transport monopolies in Germany therefore the first step towards a suc-
remained in place. But it was Erhard cessful →social policy. Secondly, inflation
who incorporated the fundamental reg- has a bad effect on investments. The
ulatory framework for competition in control signals of the market are dis-
the respective Articles of the Treaty of torted. This makes price stability one of
Rome. His agreement to the Treaty was the basic conditions for a healthy mar-
conditional upon its acceptance. ket economy.
Meanwhile, one might say that The subsidiarity principle, which
Erhard’s ideas are being re-imported has by now also been incorporated into
from the EU to Germany. The removal the EU Treaty, must find application
of the telecommunications monopoly both in the public sector and in the eco-
in Germany was possible thanks to EU nomic policy. The economy is familiar
regulations. The great danger here is with this principle since over the past
the potential replacement of public several decades nearly all large enter-
monopolies by private monopolies. In prises have been decentralised, while
this case, the state would have pocketed the internal structures were divided
one-off profits through the sales of its into manageable areas of responsibility.
enterprises, but without securing the In the sphere of economic policy,
benefits of competition for its citizens. the application of this principle must
In the course of the preparation of have the effect of competences and
the Treaty of Maastricht, price stability responsibilities being clearly assigned to
and its significance were under constant the different policy levels. This process
discussion. Among the Green parties, will make it necessary to turn the Com-
the Socialists and the Social Democrats munity from its head on to its feet. Due
the opinion prevailed that the Central to the specific nature of its historical
Bank, concurrently with price stability, development, the European Com-
should also be promoting the goals of munity was driven too far towards cen-
tralism in certain areas while the capac- linked the economic reform with the
ity for joint action was insufficient. currency reform and simultaneously
The establishment of common led the new currency, the Deutsche
external borders and the opening up of Mark, to success.
internal borders, the dismantling of Some time after the economic
trade barriers between the EU member reform, the social market economy was
countries and the introduction of a put to the test for the first time. On 12
common currency have all stimulated November 1948 the trade unions called
competition between enterprises to the a 24-hour general strike in which near-
advantage of the consumer, while at the ly 10 million employees in the Bizone
same time making them more compet- (parts of Germany under British and
itive internationally. However, compe- United States occupation) participated.
tition between enterprises is not the They were protesting not only against
only issue at stake. The member coun- price increases but against Erhard’s
tries and their regions automatically policies in general. At the same time,
start to compete with one another on the Social Democratic Party (SPD) par-
who can offer their citizens the most liamentary group in the economic
efficient public service supply on the assembly demanded Erhard’s resigna-
most favourable terms (→systems compe- tion. ‘The actual result of your policies
tition). is that you drive people to despair by
what you call freedom’, wrote Erwin
REFERENCES: Schoettle in his explanation of the
ALBERT, M. (1992), Kapitalismus contra motion put forward by the SPD. But
Kapitalismus, Frankfurt/M.; WOGAU, K. v. the general strike and the motion did
(1999), Social Market Economy – Model for
not succeed. One reason was that, as
Europe.
Erhard had predicted, the price devel-
Karl von Wogau
opment started to stabilise at the end of
1948.
In 1949, the Basic Law gave the
Federal Republic of Germany a consti-
Social market economy: Political tutional framework which did not
implementation mention a specific economic system;
but the Articles of this law did envisage
The monetary and economic reforms a democratic and free market system.
of 20 June 1948 mark the birth of the Over time, the country was also able to
→social market economy in West achieve:
Germany. It was the beginning of a
social and economic institutional order, • freedom of contract and association;
which after a short time was admired as • the guarantee of private property;
the economic miracle everywhere in • a state with a federal structure;
the world. • social security;
It was Ludwig →Erhard who sud- • worker participation;
denly, arbitrarily and against much • the central bank law;
opposition from all quarters of society, • competition laws;
402 Social market economy: Political implementation
• the gradual liberalisation of foreign full employment. This contradicted

trade; and Erhard’s convictions. He saw the eco-
• full currency convertibility. nomic situation as a consequence of
insufficient investment capital and
At the first election to the German called for the promotion of capital for-
Bundestag (parliament) on 14 August mation and private investment activi-
1949, when Konrad Adenauer became ties, which would create jobs in the
the first Federal Chancellor and Erhard long term.
was appointed Minister of Economic In the early years, the social market
Affairs, the political decision regarding economy was in a critical phase.
the social market economy won by a Adenauer was not sure whether the
hair’s breadth. During the election economic policy direction his Minister
campaign, the SPD had been demand- of Economic Affairs was following
ing state planning and controlled pro- should be pursued further. In order to
duction (→socialism/planned economy), form an opinion, Federal Chancellor
including the socialisation of large and Adenauer gave instructions at the
primary industries, financial institu- beginning of 1950 that a scientific
tions, banks and insurance companies. report should be drawn up as the basis
Certain factions of the Christian for independent proposals for a
Democratic Union (CDU) were flirt- German economic policy. Wilhelm
ing with the socialisation of at least par- →Röpke was entrusted with this task;
tial sectors of the economy (primary Röpke’s general philosophical outlook
industries), as in the Ahlen programme reassured Adenauer, and the interna-
(1947). The Free Democratic Party tional reputation of the scholar was
(FDP) opposed these moves from the beyond question. In the report, ‘Is the
outset and supported Erhard’s political- German economic policy correct?’,
economic concept during the crucial Röpke showed that there was no alter-
phase of 1948 when Erhard was direc- native to Erhard’s chosen path. Röpke’s
tor of Economic Administration of the report supported Erhard and prevented
United Economic Area in Frankfurt, a change of direction towards central
and working on currency reform by planning and control.
decontrolling prices. In 1951 Erhard and his →social mar-
During the early 1950s it was main- ket economy came under attack once
ly the labour market that was causing again. As a result of the Korean war, the
problems. The number of unemployed Allied forces demanded a government-
had risen from 800,000 in the late- managed economy as well as price and
1940s to 1.5 million in January 1950. exchange controls. Erhard resisted the
Again, many blamed this development ‘planned economy temptation’ and
on the social market economy. The immense political pressure from inside
Allied forces also criticised the apparent Germany and made only a few conces-
inactivity of the German government sions. This time, too, he consistently
and demanded a fundamental change in and persistently stuck to his position.
economic policy along the lines of The rapid economic recovery during
→Keynesianism and Keynes’s ideas on the 1950s confirmed that Erhard was
right, and economic success was there cigar’ that made him popular. It is
for all to see. therefore hardly surprising that every-
The economic development in West one was looking to him for new
Germany up to the mid-1960s was momentum after Adenauer’s term of
characterised by high growth and stable office. It was commonly thought that
prices. →Unemployment went down with courage, confidence and opti-
gradually, and towards the end of the mism, Erhard would be able to over-
1950s full employment had been come the stagnation which was threat-
achieved; workers even had to be ening political life in West Germany.
recruited from abroad. ‘Made in On 16 October 1963 he was elected
Germany’ became a brand for quality, Federal Chancellor by a large majority
which was recognised worldwide. in the German Bundestag.
Erhard rejected the concept of the eco- The first economic slump of
nomic miracle, which was becoming 1966–1967 – ‘slump’ referring to an
popular, by asserting that the develop- economic growth of ‘only’ just under
ment was not a miracle but ‘only the 2% in 1966, a clear slow-down com-
consequence of the honest effort of a pared to previous years – was the cause
whole people who had been given a of widespread pessimism during the
second chance to live in freedom and to 1960s. Calls for more public commit-
utilise human initiative, human liberty ment and excessive wage demands
and human creative energy’. undermined Erhard’s cautiously mod-
The social market economy was erate policies. His appeals to stop over-
unleashing creative forces in people taxing the available resources fell on
because it provided a platform for the deaf ears.
free development of the individual The appreciation of the need to rec-
through competitive performance and oncile what is necessary with what is
→individual responsibility, embedded in a desirable was disappearing. Voters
regulatory framework; social balancing increasingly lost faith in Erhard’s con-
secured a decent life for the needy cepts. When during the consultations
(→social justice). for the 1967 Federal budget he clearly
The social aspect of the system was advocated tax increases as opposed to an
never seen as a way of partially realising increase in →public debt to finance a
the sort of goals which →socialism was looming budgetary deficit equivalent to
demanding and promising; rather, it approximately s5 billion, his coalition
was regarded as a necessary regulatory government collapsed. But Erhard
mechanism to curb the excesses and anticipated his fall, and on 30
erroneous trends of unfettered market November 1966 he resigned as Federal
forces. This was supposed to be an inte- Chancellor.
gral part of the free market system and The hour of the Social Democrats
intended for its own good. and in particular of Karl →Schiller had
Apart from Erhard’s palpable suc- arrived. As long ago as the late 1950s,
cess as Minister of Economic Affairs, it through its Godesberg programme, the
was above all respect for the profession- SPD had openly declared itself in sup-
al competence of the ‘fat guy with the port of a free market system. And yet
there was a paradigm shift in economic can spend only what has first been
policy. The concept of the free market earned was forgotten.
was married with the Keynesian idea of Government authorities were get-
demand management. By manipulating ting deeper into debt. The state ratio
demand, the state wanted to stimulate (the proportion of public expenditure
economic growth. A →concerted action in the gross domestic product) of 30%
with the participation of the state, busi- during the 1960s rose to over 50% by
ness federations, trade unions and the the end of the 1970s. Nothing shows
→German Federal Bank was expected to more clearly that the principles of the
stabilise business cycles. Through the social market economy had been aban-
new model of an ‘enlightened econo- doned at that time: a state ratio of 50%
my’, Schiller initially managed to resus- means that half of the economy is mar-
citate the ailing economy. The econom- ket economy and the other half central
ic cycle seemed to have become con- planning.
trollable, and there was a conviction With the continually increasing
that economic development was feasi- problems of this new economic policy
ble (→constructivism). came the realisation that a change was
However, the decision-making necessary – a turn-around that would
capacity of the government was eventu- reinstate the principles of the social
ally not able to cope with these policies. market economy as the compass for
The interpretation of the concept was economic policy. The political conflict
too one-sided (expansive measures dur- over how to consolidate the budget and
ing recession, the lack of timely how to achieve a reduction of the state
restraints during times of excessive ratio, compounded by arguments on
expansion). This led to the expansion of foreign affairs and security issues, final-
the public sector while the collective ly led to a change of government in
responsibility for economic policy deci- October 1982. The new government
sions was gaining ground. Particularly placed an increased political focus on
during the very difficult phase follow- the concept of the market economy.
ing the oil crisis and the 1973 collapse The reduction of the national debt,
of the Bretton Woods monetary system massive tax reductions, the first begin-
(→currency system and exchange rate nings of →deregulation and →privatisation
regimes), the ‘new economic policy’ gave the economy new momentum.
proved to be a political-economic mis- It was soon possible to regain politi-
take. cal-economic confidence and internal
Very high wage demands placed an stability, and as the state ratio, the budg-
additional strain on the economy. The et deficit, new debts and inflation could
profit situation for businesses was be reduced, the economy began to
worsening dramatically. Furthermore, grow. It was the time when the eco-
foreign trade problems were causing nomic policy followed the motto of
monetary disturbances. The impetuous supply-orientated policy. Deregulation,
reform policies of the Social-Liberal getting rid of red tape, liberalisation and
government boosted the trend towards a focus on world markets were the
a →social welfare state. The rule that one guiding principles of the new policy.
Looked at in detail, this policy was election defeat in September 1998 of

not true to the social market economy the government of Helmut Kohl, a
in the spirit of Erhard, who felt that coalition made up of the Christian
politics should not exclusively or pri- Democratic Union/Christian Social
marily have to serve the economy while Union (CDU/CSU) and the Free
the economy is allowed to act as if it Democratic Party (FDP).
were an end in itself. The economy has After the Christian-Liberal coalition
to serve the consumer. A flourishing had been in power for 16 years, it was
economy is only meaningful if it creates replaced by a Red-Green (Social
prosperity for all. This has to be based Democratic Party-Green Party) gov-
on a consistent legal framework which ernment in November 1998. In 2005 a
prepares the ground for a competitive coalition of the Christian Democratic
economy and the development of parties (CDU/CSU) and the Social
appropriate social conditions. Democratic Party (SPD) took over, led
The economic recovery of the by Angela Merkel (CDU).
1980s, the consolidation of the public Urgent pressure for reforms and an
finances as well as the tax reform creat- overdue restructuring of the social mar-
ed stable conditions for both the ket economy continue to be on the
domestic economy and external trade. agenda. Revitalisation is necessary part-
It formed the economic basis of the ly because the mistakes of the past must
German →reunification in that it made be corrected, but also, and most impor-
the large West-East transfers possible in tantly, because of the profound and
the future (→Redemption Fund for rapid economic and social changes due
Inherited Liabilities). to globalisation, technological advances
The effort to revitalise the social and →demographic development. Indeed,
market economy in the long term slack- the framework of the market economy
ened off during the 1990s. The new needs adjustments in many areas.
challenges of the German reunification Flexibility, innovation and adaptability
and the huge financial burden during must be reinforced, and room for crea-
the economic and social integration of tivity has to be provided to act as a per-
East Germany played an important role formance incentive. Globalisation and
in this (→reunification: monetary, economic the information society are not about
and social union). The triumph of mod- usurping the social market economy
ern technology, the trend towards the with unfettered global capitalism; these
service society and the →globalisation must, rather, be vigourously adapted to
and Europeanisation of the markets the new conditions. A new model of
remorselessly exposed the weaknesses personal responsibility and independ-
of ‘location D’ (Germany). This was ence is required:
reflected in high unemployment, rising
national debt and an expanding social • Most importantly, the state has to
security system. Besides, the govern- concentrate on its functions.
ment was unable to convince the popu-
lation of the necessity for comprehen- • For the revitalisation of the social
sive reforms; this also accounts for the market economy, a simple, transpar-
ent taxation system with low tax rates ability of the German economy must
is necessary, as well as a marked be appropriately protected. To this
reduction of the state ratio and the end, a European and international
definition of the federal system as competition policy – for example, in
‘competitive federalism’ (→fiscal feder- the context of the World Trade Organ-
alism). ization – must be agreed and must
become legally binding for all enter-
• A further necessary element is an prises operating in the world market.
→employment and wage policy com-
mitted to employment creation: only The social market economy was
those earning an income can expect developed both as a liberal alternative to
to have independent control over the planned economy and as a social
their lives. At the same time, a lasting alternative to the pure market economy.
reduction of →unemployment frees It has made a major contribution to
government capacities and helps the prosperity, social harmony and political
consolidation of the budget. stability. The basic elements of the
social market economy remain valid
• Tariff reforms have to strengthen the also in the future. Its detailed form
autonomy of single enterprises in the must be adapted to the new challenges.
context of industry-wide collective This is the only way for lasting growth,
agreements, enforce moderate wage for a dynamic labour market to develop
policies associated with modern and for the economy as a whole to be
worker participation, and generally modernised in a socially acceptable
introduce more flexible elements manner, while getting ready to take on
(→labour market order). global competition.
• In the social security sector – particu- REFERENCES:
larly in the areas of pensions and SCHLECHT, O. (1997), ‘Wohlstand für

health – the balance between solidari- alle’ durch Wirtschafts- und Sozialpolitik,
in: Ludwig-Erhard-Stiftung (ed), Soziale
ty and subsidiarity has to be redressed
Marktwirtschaft als historische Weichenstellung.
and made fair and reliable for every
Bewertungen und Ausblicke. Eine Festschrift zum
age group. More personal responsibil- hundertsten Geburtstag von Ludwig Erhard,
ity means that the demographic devel- Düsseldorf, pp. 229-257; — (1999),
opment has an impact on how pen- Ordnungspolitische Leitsätze – heute so
sions are calculated. But on the other notwendig wie vor 50 Jahren, in: Ludwig
hand it has to be made clear to the Erhard Stiftung (ed), Die deutsche wirtschaft-
younger generation that they have to sordnung 50 Jahre nach dem Leitsätzegesetz,
work harder than their parents and Symposion 41, Krefeld, pp. 9-14; — (2000),
grandparents for their retirement and Ist die deutsche Wirtschaftspolitik richtig?,
health insurance (→social system; in: Ludwig-Erhard-Stiftung (ed), Ist die
→social state, welfare state). deutsche Wirtschaftspolitik richtig? Zum 100.
Geburtstag von Wilhelm Röpke, Symposion
43, Krefeld, pp. 7-15.
• In view of the increasing internation-
alisation, the regained competitive Christian Otto Schlecht
Social market economy: Principles when looking at it from a short-term

and functioning perspective. Besides goods, i.e. prod-
ucts and services, the term resource
The term social market economy is includes particularly the factors of
closely associated with the institutional production, i.e. labour, capital and
order of German economy. The under- land. The availability of the factor of
lying concept became internationally production labour depends on the
respected on account of the economic number of employable people and
miracle, which is what many people their ability (human capital), as well
called the economic development in as their mobility. Generally, one has
Germany during the years after the to take it for granted that different
Second World War. Many developing people have different kinds and
countries and also Central European degrees of ability. Capital mainly
states use this model, which was attrac- refers to production plants (produced
tive enough to help put an end to the means of production). Their capacity
division of Germany in 1989. to produce goods crucially depends
Since flexibility and adjustment are on the accessibility and sophistication
important characteristics of the social of the available technology. Finally,
market economy, there cannot be a firm apart from land that is agriculturally
definition of its political organisation. and commercially used, the factor
When the fathers of the social market land also refers to natural resources
economy were drafting this institution- such as raw materials, air and the
al order, they avoided a too detailed environment (natural capital).
outline. The relevant objective was
above all to connect ‘the principle of a • For the equal satisfaction of all needs,
free market with that of social balanc- because and insofar as the available
ing’ (Alfred →Müller-Armack) in order resources are not sufficient, there is
to create and secure ‘prosperity for all’ competition for the allocation of the
(Ludwig →Erhard). Therefore, Müller- existing resources. From the perspec-
Armack stressed that the social market tive of potential ways of allocation,
economy was conceived as an open sys- the associated means are thus scarce
tem. (relative scarcity of resources). The
The essential features of the social allocation of a resource for the satis-
market economy can be considered as faction of a need therefore implies the
basic building blocks of an institutional impossibility of satisfying other needs
economic order. Two considerations are with the same means (opportunity
important here: cost). This leads to the problem of
how to get these scarce resources to
• At the heart of economic considera- where they can be most effectively
tions are people and their individual used (problem of allocation). In
wants and needs, which can be as dif- terms of the economic principle, the
ferent as the people themselves. For answer is as follows: it is exactly that
the satisfaction of material needs, manner of allocation which, as a
given resources are used – at least result of the application of the respec-
408 Social market economy: Principles and functioning
Fundamental structure of the social market economy
Initial facts
• Individual wants • Relative scarcity of resources
Economic institutional Coordination Social system

framework procedures
• Obligation to adhere to
• Private Property Rights • Decentralised economic the principles of the social
(Art. 14(1) Basic Law) plans come together in the state at federal and
• Individual Freedom of market regional level (Art. 20(1)
Disposal (Art. 2(1) Basic • Overall economic and 28(1) Basic Law)
Law) concerning: coordination through price • Basic social values,
– consumption and formation and competition especially:
investment – resource allocation – protection of human dig-
– practicing a profession – incentive to improve nity (Art. 1 Basic Law)
– choice of place of work performance – protection of marriage
– choice of place of – stimulation to innovate and family (Art. 6 Basic
training (Art. 12(1) – distribution of income Law)
Basic Law) • Market-inherent correction – social commitment of
• Freedom of contract of individual bad decisions private property (Art.
• Freedom of trade and 14(2) Basic Law)
industry • Specification through
administrative, economic
Motivation and labour laws
• Striving for personal

advantage
• Competition: profit/loss
Constitutional state Aims Subsidiary (social) service

under the rule of law state
• at an individual level:
• individuality principle – a secure existence • Social principle
• subsidiarity principle – freedom through • Principle of solidarity
• achievement principle prosperity • Principle of need
• at a society level:
– social peace
– social security
Corrections through Operational deficiencies Correction through

institutional order policy process policy
• Market failure:
• Shaping of the economic – Disturbance of • Policy affecting income,
and social constitution, competition e.g. through:
especially through: – Deficient goods supply in – contributions (especially
– competition law the case of: taxes)
– the financial and mone- – public goods – tax rebates
tary order – external effects – customs duties
– financial constitution – natural monopolies • Policy affecting expenses,
– labour and social order – Undervaluation of the e.g. through:
– environmental legisla- environment – transfers and subsidies
tion • Government failure due to – securities/guarantees
– foreign trade order persistently wrong incen- – policies based on
• Adaptation of the tives: borrowing
institutional framework – regarding the allocation of – job-creation
through privatisation and resources programmes
de-regulation – regarding orientation to
performance

tive resources, leads to the highest nity costs of production and thus the
possible needs satisfaction. This prin- degree of scarcity of the respective
ciple also demands that for the satis- goods. On the other hand, prices are an
faction of a given need, no more expression of the readiness of a person
resources are to be used than to pay, thus showing how highly the
absolutely necessary. In other words, produced goods are valued by the con-
scarce resources must not be wasted sumer. It is these characteristics that
in order to allow the maximisation of allow prices to fulfil their function in
the overall economic benefit (→re- the market.
sources protection).
• The price system sends messages to
To solve the problem detailed above, the market participants indicating
a number of alternative coordinating which goods should be produced, in
procedures can be used. These proce- what quantity and quality. Prices also
dures characterise specific economic indicate in which way and where pro-
systems. One such practical form of duction will be most profitable. As a
coordination mechanism is the →mar- result of the →globalisation of trade
ket economy. Its most characteristic fea- relations, the price mechanism also
ture is the fact that the principle of channels resources regionally and
decentralised allocation is adhered to at thus contributes to international com-
all times. petition for location. To this extent,
When several actors willing to make the allocation of resources corre-
an exchange come together and act vol- sponds to the economic principle.
untarily, the decision is made on which
resources should be used, where and • The remuneration of the factors of
how. This is the definition of a market. production relative to their respective
The market as a coordinating system contribution to the goods supply stim-
ensures that individual economic plans ulates performance. Thus remunera-
result in a favourable outcome for all. tion as the price for work creates an
The economic agents therefore play the incentive for the development of indi-
role of suppliers and consumers of vidual performance. Similarly, an
scarce resources in the respective mar- anticipated →profit as a risk premium
ket. This refers to the factors, goods, for the invested capital promotes the
money and foreign exchange markets. readiness to take the associated risks.
This is where they are in →competition From the point of view of initiative,
with one another, trying to make their competitive prices also act as an incen-
respective plans compatible with those tive for technical progress, to produce
of the other side of the market. This goods more cheaply (process innova-
macroeconomic coordination process tion) and to improve products while
works through prices, which form as a maintaining prices, or to develop new
result of →supply and demand in the products (product innovation).
market (→market mechanism).
As a sign of free market processes, • In the end, demand preferences and
prices reflect on one hand the opportu- price signals ensure that the national
product which has been achieved is for the protection of private property
divided up fairly among the econom- and the right of the individual to dis-
ic agents, in proportion to the indi- pose of it. This particularly secures the
vidual contributions of its produc- individual freedom of disposal of pri-
tion. This defines the distribution of vate resources for the consumption of
incomes in terms of the market. income on the one hand, and for earn-
ing income on the other. This refers to
Even while fulfilling their coordi- the employment of resources for pro-
nating function, prices certainly cannot duction purposes (investment) and
prevent erroneous individual decisions, equally the investment of the personal
which the economic agents take on the ability to work (choice of occupation
basis of extremely limited information. and place of work) and the necessary
Investment decisions, for example, are training (choice of place of training).
based on a calculation anticipating prof- The legal protection for the exchange of
its, which obviously, as time goes on, resources is derived from the legal prin-
can prove wrong – with the conse- ciples of freedom of commerce and
quence of losses. freedom of trade. Individual freedom of
Crucial in this context is the fact action, however, ends when it starts to
that under competitive conditions, such restrict the liberty of a third party
erroneous decisions will not last. unfairly.
Rather, the expectations will be modi- The motivation for the participation
fied and the decisions will be corrected, in the production process is the self-
which means that the participant either interest of the economic agents. As sup-
adjusts to the market or gets out. This pliers of goods and services or as
learning process by trial and error is investors, competition forces the market
therefore referred to as a market-inher- participants to apply the factors of pro-
ent correction mechanism for erro- duction economically – this applies
neous individual decisions. equally to profit-oriented and to
This shows that the market has an achievement-oriented →enterprises. As
informing and a coordinating role to consumers, the individuals use the
play, which is an essential pillar of the incomes and profits they have earned in
respective economic system. Commer- order to derive maximum utility, with
cial exchange activities between indi- the consequence that the utilisation of
viduals presuppose that the resources to the goods that have been acquired takes
be exchanged are under their direct place according to the economic princi-
control. Thus the most important con- ple. The effect of the ‘invisible hand’
stituent component of the social market (Adam Smith, Wealth of Nations) work-
economy has been mentioned, namely, ing in that direction, makes the eco-
the existence of private property rights nomic activities of private individuals
(→property). compatible with the general necessity to
In order to guarantee this right, the use scarce resources efficiently.
economic agents of a country agree on However, the principle of self-inter-
laws which ensure these property est described here cannot be equated
rights, thus creating a legal framework with pure egoism. It corresponds to the
desire for social recognition, for ‘sym- tionalisation of state redistribution

pathy’ (Adam Smith, Theory of Ethical (protection motive) is obvious.
Feelings). The result of this is a (partial)
matching of the public and private con- • This interest in state redistribution
cepts of utility (→liberalism). This can also be useful at a personal level.
explains, for example, the frequent vol- It is true that there are incentives for
untary involvement by citizens in non- the voluntary redistribution of
profit organisations and honorary posts. income and capital within social core
In this way, the market brings about groups, such as within the context of
an overlap between public and private the family or regarding private dona-
economic goals. But the postulate of tions to charities. But due to the
macroeconomic efficiency stands side increasing size and anonymity of
by side with the desire of private market social structures, this approach soon
participants to secure their existence becomes unsatisfactory since private
and to achieve economic freedom. This solidarity cannot keep up. Moreover,
freedom is therefore also reflected in certain life-threatening risks are only
the amount of scarce resources that pri- marketable to a limited extent; they
vate individuals have at their disposal, cannot therefore be dealt with pri-
since this represents their personal vately (insurance motive). As a result,
prosperity. Private economic objectives the government or parastatal institu-
certainly do include a more or less tions (→parastatals) are tasked to
marked interest by individuals in social undertake a complementary (and
and economic security. This want can compulsory) redistribution. The his-
potentially justify the political demand tory of a special liking for social secu-
for state redistribution in two ways: rity in Germany goes back to the 19th
century and was influenced by times
• If and insofar as the majority consid- of economic hardship due to the
ers the distribution of the economic world wars. The associated ‘mentality
prosperity which comes from the of entitlement’ has meanwhile
market (primary income distribu- become a more strongly pronounced
tion) as unbalanced or unfair, private social value in Germany than in many
citizens may fear that, in reaction, the other countries.
poorer members of society could
decide to undertake a redistribution A →social system based on this has
by force (by robbery or theft). Apart been constitutionally guaranteed for the
from the direct threat to the victims, Federal Republic and the states (social
the status and organisation of private state directive). This system finds its
property would equally be at risk, and general expression in basic social values
the very foundation of the market such as the protection of human dig-
economy itself would be shaken. nity, the protection of marriage and
Therefore, unless the social system is family, and the societal restrictions on
subjected to more extensive govern- individual property rights. These basic
mental repression, the idea of ensur- values have also been incorporated into
ing social peace through the institu- regulations of administrative, economic
and industrial law. In the public budgets be protected against the competence of
– on the income side – they affect the government authorities.
taxation system by focusing on redistri- Considered from a different per-
bution (→public revenue). spective, the subsidiarity principle also
As far as expenditure is concerned, dictates that certain tasks shall be dealt
their hallmark is a complex combina- with collectively in areas of life where
tion of benefits in kind and cash pay- the private capacities of individuals are
ments (→public expenditure). Of special not enough (solidarity principle). Such
importance here are transfers to per- subsidiary collective functions are a
sons with reduced earning capacity. In characteristic feature of the social wel-
cases of →unemployment, illness or inca- fare state. In the context of the social
pacity, these are supplemented by social system, they particularly refer to a com-
security benefits. Based on economic prehensive social service that grants
policy considerations, there are benefits provisions and welfare assistance (the
for enterprises (→subsidies and tax social principle, →social justice).
reductions) granted by the state for In contradistinction to the market
redistribution purposes, although their with its focus on performance, the
justification and extent remain contro- interventions of the welfare state are
versial. based on the level of need of its mem-
This concludes the outline of the bers (the principle of need). Other gov-
basic economic components of the con- ernment responsibilities are addressed
cept of a social market economy and of through the objectives of the Growth
how these components are reflected in and Stability Act. This is an expression
the term itself. The following para- of the commitment by the state to focus
graphs go into more detail. its economic policy on a high level of
→employment, stable price levels (→price
There is, first of all, the economic insti- level stability), a positive →balance of pay-
tutional order with its intention of ments equilibrium and continued, appro-
establishing rules for the economic priate economic →growth.
exchange activities of private economic It is true, however, that these objec-
agents and of enforcing these rules. tives are in conflict with one another –
This characterises the constitutional a situation generally referred to as the
state under the rule of law, where the magic square. When the task of envi-
personal responsibility of the citizens is ronmental protection under the criteri-
given special emphasis (the principle of on of sustainability is added to this as a
→individual responsibility) and where the further objective (→resource protection), it
individual contributions to the national is sometimes also dubbed the magic
product determine the reward pentagon.
(→achievement principle). Both the market process and the
The subsidiarity principle demands social security system are, however,
that the self-sufficiency of the individ- occasionally not sufficiently effective,
ual be protected against state interfer- thus necessitating complementary cor-
ence: the abilities of individuals or their rections. Regarding market processes,
family group to solve problems are to one of the key issues is the fact that in
spite of their coordinating effect, prices price for such public resources (free
cannot always prevent bad individual riders). Similarly, a decentralised
decisions from being made. This is due coordination of individual economic
first of all to insufficient information, plans can be unsatisfactory if the
and secondly to the information about overall economic costs arising from
the nature of a product being usually the production or the consumption
distributed asymmetrically among the of the goods concerned cannot be
private economic agents. Under certain fairly assigned to those who cause
conditions, this inevitably leads to poor them, or if an appropriate attribution
market results (market failure). In view would be possible only at an excessive
of the market process, two further rea- cost (the case of external effects –
sons for efficiency-based state interven- environment). Another important
tions must be mentioned: point is that certain needs are ignored
by the market process. This applies in
• Market supply and the production the case of future generations who are
output can in the first place be unsat- unable to articulate and enforce their
isfactory if individual enterprises are interests effectively. This can lead to a
in a dominant market position and systematic undervaluation of natural
abuse this position by creating a last- resources. As a result, the state may
ing competitive disturbance. Oc- feel inspired to take measures focused
casionally, the production of certain on a lasting environmentally friendly
goods requires an initial investment economic development (→environ-
that is so high that it is more cost- ment-oriented management).
effective for one single producer
rather than a large number of suppli- It is possible that in the context of
ers to provide an economic sector the activities of the →social welfare state
with the respective resource. In such systematic misleading incentives are put
rare cases, a monopoly-like market in place:
form is basically inevitable (natural
monopolies). Under certain condi- • Measures that upset the price struc-
tions, therefore, institutional policy ture and its signal function regarding
measures may be necessary to guar- scarcity, such as when government
antee workable competition. dictates maximum or minimum
prices, undermining the information
• Second, deficiencies in the goods and allocation function of prices. The
supply are possible if no market desired redistribution effects thus
develops for certain goods or services. have to be paid for with efficiency
This can happen when specific losses which affect society as a whole.
resources can only be used by a group
of economic agents collectively, and if • By contrast, measures that leave the
it is not possible or appropriate to relative price structure intact and
exclude individual group members which purely consist of benefits in
from the use of such resources – even kind or cash payments can reduce the
when these individuals refuse to pay a effectiveness of market incentives. To
this extent, redistribution measures and Monetary Union, but also in the light
can have a performance-lowering of the background of the global com-
effect. But above all, the redistribu- merce and production network, the
tion system tends to channel produc- adjustment of the institutional frame-
tive energies in the direction of the work through →privatisation and
optimisation of the own distribution deregulation measures is gaining ever
position, be it in the shape of transfer- increasing importance, so that the eco-
maximising individuals or in the nomic constitution can continue to
form of subsidy-maximising enter- meet its ongoing challenges both at a
prises (so-called rent-seeking). This national and an international level.
shows that distribution measures can However, in the context of process
cause a prosperity loss affecting the policy, apart from a policy of stability
economy as a whole. Political oppor- and growth, the service state is also con-
tunity and changing economic condi- cerned with the advancement of the
tions thus subject the social market social security systems. It is a fact that
economy to an ongoing adjustment due to the structural transformation
process. Apart from the self-correc- that has resulted from competition and
tion mechanism inherent in the sys- phenomena associated with it – espe-
tem, the regulations and the social cially a relatively high level of unem-
security system also have to adapt to ployment – the system is over-
the changed requirements. There is stretched.
therefore not the one and only or a It is also important to keep the social
new version of the social market security system affordable despite an (in
economy, but rather its current form, that respect) unfavourable →demograph-
chosen at any one point in time and ic development. Finally, it is essential to
always subject to a dynamic process balance the inevitable contradictions
of development. between institutional order policy and
its commitment to competition and
In summary, this process involves process policy with its current focus on
the underlying concept of two political redistribution and compensation
areas: (→institutional order policy and process poli-
Taking into account institutional tics).
order policy, the constitutional state is Accordingly, it is necessary to meet
eager to formulate and guarantee the the demands made on the state to the
crucial elements of the economic and best of its ability, while at the same time
social constitution. Corresponding preserving the performance incentives
policies shape particularly the areas of that are actually responsible for the
competition law, the monetary and cur- existence of redistribution, i.e. the cake
rency regulations, the financial consti- that can be shared. It also has to be
tution, the labour and the social securi- remembered that it is the market and
ty order, as well as environmental poli- the efficiency of its allocations which
cy and foreign trade. With a view to the create the relevant conditions for the
integration of the domestic market social component in the social market
economy into the →European Economic economy.
Admittedly, old-style economic develops during this process fulfils

miracles are no longer on the cards at several roles – the balancing and the
this stage of the development of the signal role, as well as the control and
economic constitution, but prosperity the incentive role.
for all definitely still is. In conclusion,
and in accordance with the overview • Yet, the market system does not
given above, the essential structures of always function smoothly in every
the social market economy can be out- case. Just like the desire for →social
lined as follows: balancing, various disrupting factors –
either of an external nature or inher-
• Economics can be described as the ent in the system – require corrective
handling of limited goods by the eco- measures in order to allow the objec-
nomic agents for the satisfaction of tives of the concept to become and
wants. remain a reality.
• For a rational economic exchange of • Government interventions can be

goods, a coordination system is nec- found in policies affecting the institu-
essary. This is the institutional order tional order of economy or the eco-
of economy. nomic process. The large number of
available instruments and institution-
• The social market economy is an al regulations must be examined to
institutional order-related pro- see whether they are compatible with
gramme based on the principles of a the system. And when social goals are
competition-oriented economy, link- aimed at, a reasonable ends and
ing free personal initiative with social means relationship must be observed
progress, made possible through the so that resources are not wasted. This
economic effectiveness of a success- can be ensured only through solidar-
ful market. ity and the application of the sub-
sidiarity principle, which neither
• In order to be able to fulfil this func- undermines the motivation for per-
tion, the institutional order has to sonal initiative and personal responsi-
meet a number of constitutive condi- bility nor ignores or exaggerates social
tions. The structural elements which responsibility.
need to be mentioned are: private
property, freedom of production, • Political opportunity and changing
freedom of action, freedom of trade, economic conditions have the conse-
free choice of occupation, free choice quence that the social market econo-
of workplace and freedom to con- my is subjected to constant adjust-
sume. ment processes. As such, the legal reg-
ulations and social security system
• If these conditions are met, the inter- must also be adapted and changed.
ests of suppliers and consumers will There is therefore not one final ver-
meet in the market under competi- sion but only a specific form of the
tive conditions. The price which social market economy at any one
416 Social market economy: Social irenics
point in time, which in the context of Marktwirtschaft, Bern; RODENSTOCK, R.

the principles mentioned is in an (2001), Chancen für alle – Die Neue Soziale
ongoing, dynamic process of develop- Marktwirtschaft, Cologne; RAUHUT, S.
(2000), Soziale Marktwirtschaft und Parlament-
ment.
arische Demokratie – eine institutionen-ökonomis-
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The concept of social irenics goes back
twirtschaft, Hamburg (fax edition, Düsseldorf
1999); — (1956), Soziale Marktwirtschaft, to Alfred →Müller-Armack. Irenics refers
in: Handwörterbuch der Sozialwissenschaften, 9, to the theory of peace. The term itself is
Stuttgart, pp. 390ff.; — (1976), Wirtschafts- derived from the Greek word eirene
ordnung und Wirtschaftspolitik – Studien und (peace) and from the name of the Greek
Konzepte zur Sozialen Marktwirtschaft und zur goddess of peace, Eirene, daughter of
Europäischen Integration, 2nd edition, Bern, Zeus. In its specific sense, Müller-
Stuttgart; — (1981), Genealogie der Sozialen Armack used the term to:
Marktwirtschaft – Frühschriften und weiter-
führende Konzepte, Bern; NÖRR, K. • illustrate a social idea which links all
W./STARBATTY, J. (ed) (1999), Soll und
the various world views; and
Haben – 50 Jahre Soziale Marktwirtschaft,
Stuttgart; QUAAS, F. (2000), Soziale
Marktwirtschaft – Wirklichkeit und Verfremdung
• connect with the social dimension of
eines Konzepts, Bern; QUAAS, F./STRAUB- the institutional order of economy
HAAR, T. (1995), Perspektiven der Sozialen known as →social market economy.
Social market economy: Social irenics 417
Central to the former way of using irenic process of reconciliation all dif-
the term is the question how, even in the ferences (contrasts) need not necessari-
case of dissimilar approaches of social ly be overcome.
theory and despite existing differences, If, however, the attempt to find
the organisation of the →social system can common ground in fundamentally
be understood as a common task. By contrasting world views is not supposed
way of example, Müller-Armack applied to be utopian and fail, one has to take
this idea to the intellectual situation of into account that this common ground
the Western European world after the is hardly going to be found in a concrete
Second World War, when he considered social system, but most probably in an
Catholicism (→Catholic social doctrines), abstract moral idea of a social concept.
Protestantism (→Protestant social ethics), Such an abstract universal idea of a
→socialism and →liberalism to be the social concept could attain a high meas-
prominent philosophical positions, and ure of acceptance as it includes value
simultaneously predicted that probably judgments for which a consensus can
none of them could be displaced in the be achieved.
foreseeable future, but that equally none In democracies, such fundamental
would become absolutely dominant values consist above all in the acknowl-
over the others. edgment of liberty and →social justice.
Social irenics suggests how one These two values also form the basis of
should deal with the inevitable co-exis- the concept of the social market econo-
tence of differing world views. It is less my. Combining the efficiency of a free
a matter of blurring existing contrasts market with social balancing in such a
than of accommodating and reconciling way that politically and economically
them under the condition that ‘the divi- both aspects receive sufficient attention,
sion is accepted as a given, which how- requires the ability to look at issues from
ever does not terminate the effort to different angles and to weigh up the
achieve unity’ (Müller-Armack 1950, p. existing options against one another.
563). Müller-Armack did exactly this
Müller-Armack therefore referred when he developed his concept of the
to as ‘false irenics’ any attempt to social market economy, differentiating
explain away philosophical positions it from other economic and social theo-
that differed from one’s own position. ries and practices. To this extent, his
Only if equal co-existence of different concept is itself an example of a social
intellectual and philosophical positions irenic approach. It is both an independ-
is acknowledged can irenics be success- ent social idea which goes beyond any
fully applied as a possible solution. Each individual world view, and an integra-
group of world views is faced with the tive, open stylistic concept about the
task of overcoming its own isolation by humanisation of society through social
integrating the missions and perspec- structures which are aimed at equality
tives of others into its own thinking. and the irenic reconciliation of con-
Müller-Armack was thus of the view flicts.
that specific positions need not be com- At the same time, the social market
pletely abandoned, and that during the economy as a concept of society
418 Social partners
becomes a particularly concise example REFERENCES:
of a scientific but practical approach, MÜLLER-ARMACK, A. (1950), Soziale

which is characterised by the fact that Irenik, Wiederabdruck in: ibid, Religion und
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unserer Europäischen Lebensform, 3rd edition,
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1981, Bern, Stuttgart, pp. 559-578; —
The appropriate instrument is shap- (1969), Der Moralist und der Ökonom. Zur
ing the institutional order policy (Ord- Frage der Humanisierung der Wirtschaft,
nungspolitik) through which the free in: ibid, Genealogie der Sozialen
market can be fine-tuned in such a way Marktwirtschaft. Frühschriften und weiter-
that everybody benefits from the social führende Konzepte. 2nd revised edition, 1981,
cooperation. The allegedly irreconcil- Bern, Stuttgart, pp. 123-140; — (1973), Der
able values of liberty and justice can humane Gehalt der Sozialen Marktwirtschaft,
thus be potentially reconciled in a spe- ibid., pp. 167-175.
cific way, which is not the usual com-
promise (where there is a winner and a Friedrun Quaas
loser) but by moving in the direction of
a win-win situation.
The social structuring of income as Social partners
well as infrastructure and environmen-
tal investments were particularly In Germany, trade unions and employ-
important to Müller-Armack, who ers’ associations are frequently referred
wanted to ensure the prosperity of the to as social partners. Firstly, this is sup-
broadest sectors of the population. posed to be an indication that the con-
Furthermore, in his view, the struggle cept of class struggle is a thing of the
for a socially acceptable organisation of past. It indicates, secondly, that they are
the regulations governing →industrial collective bargaining partners and as
relations (→co-determination) was also an such are obliged, in terms of the Basic
example of an irenic approach in the Law and in the context of the freedom
economy. of coalition and bargaining autonomy,
From the ethical perspective of to make a positive contribution ‘to the
striving for social harmony, Müller- preservation and promotion of condi-
Armack referred to the social market tions in the workplace and the economy
economy as an ‘irenic formula’ that as a whole’ (Basic Law, Article 9(3)). In
‘tries to bring about a reasonable bal- this sense, the social partners are play-
ance between the ideals of justice, liber- ing an important part in making the
ty and economic growth’ (Müller- →social market economy work.
Armack 1969, p. 131). At the same time, At enterprise level, in terms of s. 3 of
it appears to be an attempt to achieve the Industrial Constitution Law, works
public aims that serve the common councils and management are encour-
good on the basis of a stable order and aged to cooperate as operating partners
to resolve →conflicting aims in economic in a spirit of mutual trust and for the
policy peacefully. benefit of the workers and the enter-
prise. For the protection of workers’
interests, graduated rights to informa-
tion and hearings as well as more exten- counter the politicisation of labour con-
sive rights to co-determination are on flicts.
the agenda (→industrial relations constitu-
tion). REFERENCES:
At association level, trade unions MÜLLER-ARMACK, A. (1962), Das

and employers’ associations as bargain- gesellschaftspolitische Leitbild der Sozialen
Marktwirtschaft, Neuabdruck in: ibid,
ing partners negotiate the details of the
Wirtschaftsordnung und Wirtschaftspolitik.
general working and remuneration
Studien und Konzepte zur Sozialen
conditions. Collective wage agreements Marktwirtschaft und zur Europäischen
made possible through the autonomy Integration, Bern, Stuttgart; SANMANN, H.
of bargaining are supposed to make up (1988), Artikel Sozialpartner, in: Hand-
for the structural inferiority of individ- wörterbuch der Wirtschaftswissenschaft
ual workers opposite their employers. (HdWW), ungekürzte Studienausgabe, 7,
At national level, through represen- Stuttgart, Tübingen, Göttingen; RÖSNER,
tatives chosen at union and manage- H. J. (1990), Grundlagen der mark-
ment elections, the social partners par- twirtschaftlichen Orientierung in der
ticipate in the independent administra- Bundesrepublik Deutschland und ihre Bedeutung
tion of the social security services, the für die Sozialpartnerschaft und Gemein-
wohlbindung, Berlin.
→Federal Employment Agency, as well as
the jurisdiction for labour and social
security matters.
At the supranational level, within
the European Union, joint rights to be
granted a hearing and to make recom- Social partnership
mendations form part of the social dia-
logue with the European Commission. The first time that labour relations were
Furthermore, the social partners parti- described as a social partnership was in
cipate in the →International Labour 1947, in the context of the concerted
Organization and its recommendations. reconstructive efforts by trade unions
A point of contention, however, is and employers. The reconciliation of
the issue of how far the social partners interests in the spirit of social partner-
should become involved in the formu- ship has since then not only ensured
lation or implementation of govern- that in Germany labour disputes have
ment policy measures, such as in the remained comparatively infrequent, but
context of a →concerted action or in the it has also been instrumental in the eco-
‘Alliance for Employment’. nomic and social progress from which
In principle, it would certainly be large sectors of society are deriving vis-
desirable for the social partners to bring ible benefit.
their economic and socio-political Social partnership thus represents a
expertise to the table, but this must not cornerstone of the social market econo-
result in an elimination of their respec- my intended by its architects as a lesson
tive responsibilities. It is more impor- in peace, which is supposed to persuade
tant for the bargaining autonomy to the main creative forces in a society to
take some of the load off the state and to solve their conflicts through consensus.
420 Social policy
However, the danger still exists that Social policy

individual interest groups, such as the
collective bargaining partners, will try The term social policy refers both to an
to defuse their conflicts by coming to area of political activity (applied social
an agreement at the expense of a third policy) and to the academic work being
party (→social partners). done at international, national and busi-
Correctly understood, a social part- ness levels (the teaching of social poli-
nership therefore needs to emphasise cy).
that, apart from differences, there are The social policy of a government
also common interests. It also needs to concerns that aspect of political acting
remind people of their social responsi- which, by applying appropriate means,
bilities. This commitment to the com- wants to improve the economic and
mon good is necessary for the harmon- social positions (= circumstances) of
isation of labour relations to link eco- groups of people who either absolutely
nomic and social efficiency, and thereby or relatively (i.e. compared with others)
to achieve an altogether higher degree are regarded as weak – for example,
of social security. Social partnership because they are not capable of earning
represents the attempt to reconcile the a subsistence level →income.
postulates of →Protestant social ethics with The need for social policy exists in
the concept of a liberal economic insti- every developed society that has a high
tutional order. degree of division of labour, independ-
ently of the →economic order of the soci-
REFERENCES: ety.
MÜLLER-ARMACK, A. (1962), Das In the absence of social policy, the
gesellschaftspolitische Leitbild der Sozialen following problems would arise:
Marktwirtschaft, Neuabdruck in: ibid,
Wirtschaftsordnung und Wirtschaftspolitik.
• The subsistence of incapacitated or
Studien und Konzepte zur Sozialen
Marktwirtschaft und zur Europäischen
partially incapacitated individuals
Integration, Bern, Stuttgart; SANMANN, H. (children, the aged, the sick, the dis-
(1988), Artikel Sozialpartner, in: Handbuch abled and the unemployed) would
der Wirtschaftswissenschaft (HdWW), not be secure.
ungekürzte Studienausgabe, 7, Stuttgart,
Tübingen, Göttingen; RÖSNER, H. J. • Because innate and acquired abilities
(1990), Grundlagen der marktwirtschaftlichen can differ as much as the opportuni-
Orientierung in der Bundesrepublik Deutschland ties to apply them economically, the
und ihre Bedeutung für Sozialpartnerschaft und consequent differences in income
Gemeinwohlbindung, Berlin. and capital would be so significant
that they would have to be (partially)
balanced.
• The business managers’ efforts to

achieve maximum efficiency could
endanger the health and other basic
interests of the workforce (such as
Social policy 421
sufficient time for recreation and • The social security system, which
decent working conditions). through →pension,→health, → nursing
care, →accident and →unemployment
• The structural transformations asso- insurance schemes, protects the
ciated with economic progress can majority of citizens against the eco-
cause adjustment problems (depreci- nomic consequences of temporary or
ation and dismissal of human capital, continuing disability in old age and
bankruptcies) which for reasons of in times of reduced earning capacity,
→social justice must not be borne only and which also protects widows,
by those concerned but by the greater widowers and orphans. In addition, it
society. provides cover for illness, private
nursing care and unemployment
• In certain sectors, particularly in the and, through the →basic social security
job markets (→labour market system), services, also protects from hardship
the agricultural commodities markets those who have not earned any claim
(→agricultural policy) and the insur- to social security.
ance markets, the market fulfils its
function insufficiently, and because • Factory (plant) and industrial relations
of market failure is responsible for policies give the workers the right to
unfair treatment (such as through information, objection, consultation
excessively low wages in job markets and co-determination with regard to
which lack trade unions) or when the organisation of the workplace,
certain economic agents are disadvan- work routine, working hours, forms
taged (private insurance schemes, for of remuneration, employment and
example, do not offer cover for dismissal (→industrial relations constitu-
unemployment, inflation and serious tion, →co-determination).
medical risks, and frequently also
only protection in insufficient quality • →Labour market policy, whose efforts
and quantity). to improve the quality of the job mar-
kets are supported by the labour
Social policy therefore covers the fol- administration (→Federal Employment
lowing areas: Agency). By changing the forms of the
job market through the freedom of
• Worker protection policies, including coalition and the autonomy of bar-
the limiting of working hours, the gaining, labour policies also con-
prohibition of child labour, the pro- tribute to an economically and social-
tection of children and young people, ly acceptable wage-fixing process
the legal protection of expectant and (→labour law, →industrial action,
nursing mothers, the protection →social partnership).
of the disabled, the prevention of acci-
dents and occupational hazards, as • →Housing policy, which is aimed at
well as the protection against giving all citizens access to housing
unfair dismissal (employment protec- with quantitative and qualitative min-
tion) (→occupational health and safety). imum requirements.
422 Social policy
• →Family policy, which through finan- • To secure and increase material free-
cial benefits makes it easier for fami- dom through personal opportunities
lies to meet their commitments, and for becoming gainfully employed, a
which creates basic conditions that system of social security and a policy
are favourable for families. for combating poverty.
• →Education policy, which is aimed at • To implement social justice (equal

making up for unequal starting chances and fairness of distribution).
opportunities and at the formation of
sufficient human capital. • To protect social harmony (peace).
• →Wealth accumulation policy, which is Before these main goals can be

aimed at a broader distribution of achieved, certain instrumental goals
material assets and which will help to have to be tackled:
counterbalance the concentration of
increasing wealth in the hands of a • The protection and recovery of
few. health (worker protection, health
insurance).
• →Middle class policy, which is sup-
posed to assist the largest possible • The creation, preservation and
number of people to lead an inde- improvement of one’s chances of
pendent existence. securing gainful employment as an
independent, secure basis of existence
• The policy for the support of youth (education and labour market policy,
and the aged, which is for the protec- worker protection).
tion of the economically weaker
rather than the gainfully employed; it • The protection of human dignity and
is supposed to ensure the necessary free development of the personality
provision for their respective age- (worker protection, plant and indus-
related needs. trial relations constitution, and poli-
cies for housing, the youth and the
The authorities implementing the aged) based on the principles of equal
national social policy are the federal gov- treatment and →social justice.
ernment, the states, districts and munic-
ipalities, the so-called →parastatals (pen- • Social security through the creation
sion insurance scheme, health insurance of appropriate conditions for gainful
scheme, etc.), non-governmental chari- employment (labour market, educa-
table organisations (Caritas, the Welfare tion policy) and a system of interper-
Organisation of the Protestant Church, sonal income redistribution (→distri-
the Red Cross), as well as the trade bution) in the event of incapacitation
unions and employers’ associations. (social security system, social security
Germany’s social policy is focused assistance). The maximum goal of
on three main goals (→social state and social security is the maintenance of
welfare state): one’s standard of living, while the
minimum goal is to live with dignity labour, social and environmental stan-
at subsistence level. dards – and compete with one another
– the result is intensified competitive
• The compensation (balancing) of and adjustment pressure (→systems com-
differences in income, wealth and petition). But even at a national level,
financial commitments through permanent mass unemployment and
redistribution policies (the social demographic changes have created new
security system, education, family, challenges which demand a conceptual
wealth accumulation and housing reorientation of what used to be a clear
policy). In the pursuit of social policy demarcation between private and pub-
objectives, certain organisational lic risk prevention.
principles should be adhered to International social policy is investi-
(→social system). gating different ways of structuring
social security systems. Empirical com-
REFERENCES: parisons of practical social policies are
LAMPERT, H./ ALTHAMMER, J. (2004), carried out and new theories are con-
Lehrbuch der Sozialpolitik, 7th edition, Berlin; sidered. The main objective is to find
FRERICH, J./ FREY, M. (1993), Handbuch
solutions for each of the areas of risk
der Geschichte der Sozialpolitik in Deutschland,
prevention which express a specific
3, Munich, Vienna; BUNDESMINIS-
TERIUM FÜR GESUNDHEIT UND
socio-political stance, and which have
SOZIALE SICHERHEIT (ed) (2003), been tried and proved successful in
Übersicht über das Sozialrecht, Bonn (available other countries (best-practice proce-
at http://www.bmwa. bund.de); BUNDES- dure). These solutions could then be
MINISTERIUM FÜR WIRTSCHAFT adopted at home and internationally,
UND ARBEIT (ed) (2003), Übersicht über either unchanged or modified.
das Arbeitsrecht, Bonn (available at http:// If the significant developmental dif-
www.bmwa.bund.de). ferences between countries are consid-
ered, as well as their specific problems
Heinz Lampert and their historical and cultural back-
grounds, it is doubtful whether this sci-
entific and political cooperation will
Social policy: International lead to international agreements on
mandatory social minimum standards
The social security systems are in need or even to a universally accepted world
of restructuring. To this end, many social model (which may not even be
countries are searching for a new para- desirable). It should, however, be possi-
digm. In terms of the global economy, ble to see qualitative improvements
the growing international location regarding socio-political effectiveness,
competition has led to changes in the efficiency and transparency. If and to
division of labour, and increasing the extent that international social poli-
regional interconnections between eco- cy succeeds in developing the theoreti-
nomic and social spaces. cal components for a universally appli-
When different socio-political con- cable theory of social risk prevention, it
cepts meet, each with its complex could be used worldwide to build,
424 Social state and welfare state
reform and transform national social nursing care and the loss of the
security systems. This would con- breadwinner; and
tribute to international harmonisation
and integration. • it nurtures prosperity and ensures
that the →distribution of this prosperi-
REFERENCES: ty can be considered as just (Zacher
RÖSNER, H. J. (1999), Soziale Sicherung 1989, p. 29).
im konzeptionellen Wandel – ein Rückblick
auf grundlegende Gestaltungsprinzipien, in:
According to the Basic Law,
Hauser, R. (ed), Alternative Konzeptionen der
Germany must be a ‘democratic and
sozialen Sicherung, Schriften des Vereins für
Sozialpolitik, 265, Berlin, pp. 11-83.
social federal state’ (Article 20) where
‘the constitutional system in the states
Hans Jürgen Rösner ... is based on the principles of the
republican, democratic and social state
under the rule of law’ (Article 28). The
precept of the social state, which is cen-
Social state and welfare state tral to the Basic Law, can be refined
with the help of other Articles in the
The currently prevailing legal opinion Basic Law that refer either to objectives
is of the view that the social state clause contained in the concept of the social
in the Basic Law represents the authori- state or to the delimitations of its wel-
sation and appointment of the legisla- fare activities.
ture and the administration to involve In the case of specific social groups,
themselves in the organisation of the such as low income earners, basic rights
social system and to work towards the do not become automatically effective
aim of social justice and social security just because they are legally granted;
in a liberal-democratic order (Stern, they require additional conditions in
1987, column 3272 f.). order to be fulfilled. Thus the social
A country is considered a welfare state has the important task of having to
state when: ensure that in the context of the consti-
tution and limited financial means, the
• it offers assistance to those affected by conditions for an adequate existence for
exigencies and poverty, ensuring an as many members of society as possible
appropriate subsistence level; are guaranteed. In order to succeed in
this, it is necessary to go beyond the
• it focuses on legal and actual equality formal guarantees of the Basic Law and
by doing away with socio-economic to set minimum government standards
disparities and dependent relation- that provide the material basis indispen-
ships; sable for the realisation of the basic
rights of personal liberty (Article 2(2)),
• it grants social security in relation to free development of personality (Article
accident risks and the risks of illness, 2(1)), equality before the law (Article 3)
premature incapacitation, →unem- and free choice of occupation (Article
ployment, old age, the need for private 12).
The logical consequence is that eco- and fierce defence of benefits obtained.
nomically weak members of society The consequences of this would be the
have to be provided with a minimum violation of fundamental social values,
income to secure their existence and such as personal liberty, fair reward for
give them at least some space for the personal performance (→achievement
free expression of their personality. principle) and personal initiative and
Article 6, which places marriage and the responsibility.
family under special public protection, Furthermore, when enterprises and
asks that measures be put in place by citizens have been burdened with
the social state to enable families to ful- excessive tax and social security contri-
fil their crucial social tasks more reliably butions, and technical equipment has
(→family policy). become outdated as a result of dispro-
The delimitations of the involve- portionate (maintenance) →subsidies,
ment of the social state result from cer- the economy will suffer domestically
tain fundamental rights, since socio- and will no longer be able to compete
political activities of a certain nature and internationally.
predetermined extent (such as far- In the political and academic
reaching social policies implemented by domains, opinions differ about exactly
any state or especially a socialist state) where and when the welfare state starts,
can interfere with personal liberty, per- but there is widespread agreement that
sonal responsibility and human dignity. the following areas of social policy and
For these reasons – and because in a of the →social system have to be devel-
pluralist, multiparty democracy with oped by the social state:
strong associations further norms have
to be considered – the subsidiarity prin- • Social insurance and →basic social secu-
ciple and the principle of plurality are rity.
equally of importance. The latter, inter-
preted as pluralism in the philosophical • The world of labour through (in the
and political sense, requires independ- case of the German example) policies
ent social institutions (kindergartens, regarding worker protection, the
schools, hospitals, homes for the elder- industrial relations constitution, the
ly, institutions offering counselling and labour market order and labour mar-
care). ket process and full employment.
Countries that over-emphasise their
role as social states are called welfare • The economy in general through an
states. The dividing line between the →institutional order policy regarding
social state and the welfare state has competition and a policy for the pro-
been crossed when individuals, to a tection of those who are economical-
large extent, no longer have to worry ly vulnerable (such as policies for
about their livelihood and their future. consumer protection and protection
If this happens, the subsidiarity princi- for tenants and expectant and nursing
ple will have been ignored and the soli- mothers).
darity principle will be sufficiently
extended for an attitude of entitlement • The education sector through a poli-
426 Social system
cy aimed at equal opportunities nomically based social relationships

(→education and research policy). between society members (such as
employer-employee relations). In this
• The living conditions of families and sense, the social system is a sub-system
economically weaker households of the organisation of a society.
through family and →housing policies The economic and the social insti-
and through policies of (carefully tutional order are interdependent; as
proportioned) redistribution of sub-systems of the organisation of a
wealth and income. society they belong at the same level,
meaning that basic economic and social
• The environment through an →envi- goals should be awarded the same rank.
ronment-oriented policy. The social quality of a society
depends particularly on the economic
REFERENCES: institutional order, because economic
LAMPERT, H. (1997), Krise und Reform des conditions have a profound impact on
Sozialstaates, Frankfurt/M.; LAMPERT, H./ the social position of individuals and
ALTHAMMER, J. (2004), Lehrbuch der
groups.
Sozialpolitik, 7th edition, Berlin; STERN, K.
Among other things, the social sta-
(1987), Sozialstaat, in: Herzog, R. (ed),
Evangelisches Staatslexikon, 3rd edition,
tus, social position and social security of
Stuttgart, column 3269ff.; ZACHER, H. individuals and groups depend on the
(1989), Vierzig Jahre Sozialstaat – way income and property are distrib-
Schwerpunkte der rechtlichen Ordnung, in: uted, on the equality or inequality of
Blüm, N./Zacher, H. (eds), Vierzig Jahre personal opportunities and on the
Sozialstaat Bundesrepublik Deutschland, chances a person has to achieve eco-
Baden-Baden, pp.19ff. nomic success.
The specific social content inherent
Heinz Lampert to economic institutional orders varies
depending on the conception of what is
socially desirable (→social policy). For
Social system example, the basic social content in the
industrial societies of the 19th century
In the wider sense, the term social was very low. The livelihood of the
system refers to the organisation of a workers and their families was continu-
society and all the rules and institutions ally at risk because there was no social
relevant for its structure and for the assistance for living expenses in the
relationships between its individual event of illness, unemployment or old
members and social groups. In the nar- age. Excessively long working hours
rower sense, the term designates all the and working conditions that were sub-
institutions and norms that determine standard represented health hazards.
the social status of individuals and Housing conditions were appalling. In
groups in a society – insofar as there is contrast to this, the →social market econ-
an economic aspect to it (such as due to omy of Germany offers a high basic
→income, assets, profession). But it social content.
equally refers to the regulation of eco- Based on the moral concepts pre-
Social system 427
vailing in a →social state and welfare state, society, in the course of its develop-
the level of the basic social content in an ment, has been able to make room for
economic institutional framework is social norms as opposed to economic
determined based on: ones. Experience shows that the econo-
my by itself does not generate many
• whether it is able to boost economic social standards other than those on
development and to distribute the whose fulfilment the functioning of the
accumulating income (→distribution) economy depends.
and capital (→wealth accumulation poli- Generally, social interactions with a
cy) in a performance-related manner commercial purpose tend to be subject
(prosperity for all); to the rule that finite means must pro-
duce a maximum yield, or that a certain
• whether it is able to prevent →unem- yield should be achieved at minimum
ployment; expenditure. This is why a society has
to introduce and implement an institu-
• whether it is able to cover the living tional framework which takes care of its
expenses of members of society who non-economic needs, and, above all,
are unfit for work or are poor achiev- the goals of →social justice, social securi-
ers; ty and social peace.
Economically and socially, the sys-
• whether it is able to guarantee pur- tem as a whole will be more satisfactory
chasing power stability, since a as it succeeds in integrating both eco-
decline in purchasing power hits low nomic and social goals in the different
income earners hardest and favours sectors of the economy – such as the
the owners of material assets (→price monetary, labour and competition
level stability); order and the works constitution –
while organising the elements of these
• whether it is able to limit personal sub-systems in such a way that the
dependence and to guarantee basic social objectives are assigned an inde-
human rights; and pendent status, and conflicts with eco-
nomic policy objectives are minimised.
• whether it is able to assert economic In order to fine-tune this system so
and social group interests through the that both economic and social goals
freedom of association and to bring have the best possible chance of suc-
about the reconciliation of interests, cess, the decisions on which principles
particularly between employers and the economic and social institutional
employees (→social partnership, →co- order will be based are crucial.
determination), between consumers Among the relevant principles are
and producers, and between individ- personal responsibility, subsidiarity, sol-
uals and society. idarity, self-reliance and the principle of
the social state, as articulated in Articles
The basic social content in any 20 and 28 of the Basic Law. The princi-
given economic institutional order ple of personal responsibility (→individ-
depends on the extent to which the ual responsibility) demands that the
428 Social system
restriction of personal liberty and tions. What kind of aid and how much
autonomy through social policies aid are granted will depend on the spe-
should be kept to a minimum. cific circumstances of those concerned.
The subsidiarity principle demands In Germany, the view prevails that
that no social institution should take on the welfare principle as it is applied by
tasks that individuals or smaller social the social security services (→basic social
organisations can manage at least as well security) is unsatisfactory, both because
– meaning that self-help is preferable to of the poorly defined nature of the serv-
external help; but it nevertheless ices and because the services make
demands that the larger institutions means testing necessary and the assis-
lend the lesser ones their assistance to tance has the character of external aid.
enable them to fulfil their functions. The principle of provision is based
The solidarity principle is based on on claims arising from services ren-
mutual support and ethically based dered to the government (civil and mil-
mutual responsibility between the itary service). Individuals who qualify
members of a social group (family, are legally entitled to state benefits
municipality, insurance member which are standardised in respect of
group); it postulates that similar cir- their nature and extent. They are fund-
cumstances and shared interests should ed out of tax revenue.
be the basis of mutual assistance. This principle is disputed as an
The automatic consequence of the instrument for the insurance against
fundamental values of solidarity, sub- basic risks, because it runs counter to
sidiarity and personal responsibility is the principles of subsidiarity and per-
that the principle of self-reliance has sonal responsibility by exempting from
special significance for the social sys- social insurance contributions, individ-
tem, particularly in the area of social uals who can well afford them.
security. Social self-reliance implies the The insurance principle is based on
autonomous, decentralised fulfilment the insight and observation that while
of legally assigned functions according in individual cases the occurrence and
to the subsidiarity principle by solidari- costs of potential risks cannot be
ty-linked communities. The principle assessed in advance, these risks become
of the social state confers the right upon calculable since many individuals are all
the state to engage in social activities living with similar risks. The services
while at the same time putting it under are based on legal claims, standardised
the obligation to provide the requisite in terms of kind and amount. In most
material basis for the full enjoyment of cases, family members who are not
human fundamental rights and espe- gainfully employed are covered equally.
cially for free personal expression. They are financed through contribu-
The social security system applies tions which – unlike those of private
the principles of welfare, provision and insurance schemes – are calculated not
insurance. In compensation for claims on the basis of individual risk probabil-
based on the welfare principle, govern- ities but, according to the solidarity
ment aid is granted when there is need, principle, on the basis of what the
even in the absence of prior contribu- members can afford.
REFERENCES: Friedrich Engels (1820–1895), is based

LAMPERT, H./ALTHAMMER, J. (2004), particularly on the ideas of the utopian
Lehrbuch der Sozialpolitik, 7th edition, Berlin socialists, the Saint-Simonists and their
et al; LAMPERT, H./ BOSSERT, A. (2004),
progression towards historical material-
Die Wirtschafts- und Sozialordnung der
ism, as well as Babeuf ’s concept of class
Europäischen Union, 14th edition, Munich,
struggle.
Vienna; BLÜM, N./ZACHER, H. (eds) This is where the concept of admin-
(1989), 40 Jahre Sozialstaat Bundesrepublik istrative socialism as a state-controlled,
Deutschland, Baden-Baden. planned economy originated. Its best-
known form is the centrally adminis-
Heinz Lampert tered economy in the former Soviet
Russia. The collective or national prop-
erty is centrally administered by gov-
Socialism/planned economy ernment authorities, officially legit-
imised by Lenin’s principle of demo-
Socialism is a general term for ideas and cratic centralism, incorporated into the
political currents, which, particularly nationally planned economy and used
since the beginning of the 19th century, for predetermined political goals
stand for social equality and justice with (→interventionism).
the goal of overcoming the exploitation Centrally administered economic
of human beings by other human planning and control of the economic
beings. To this end, it is postulated that process are based on balance sheets
the private ownership of the means of showing the emergence and the utilisa-
production should legally or factually tion of products. Here an attempt is
become collectively or nationally made to manipulate the material and
owned (→property). financial aspects of the multi-level plan-
The representatives of utopian ning process in such a way that the
socialism – Etienne Cabet (1788–1856) goals of the government plan and the
and François Noël Babeuf (1760–1797) operational plan fulfilment coincide.
– favoured a radical egalitarianism and Due to the inevitable need to plan
were advocating state control in all areas quantity, finance and price simultane-
of life. Henri Saint Simon (1760–1825) ously – and with diverging interest on
and his followers (the Saint-Simonists) distribution and different concepts of
were pursuing the idea of planned, con- scarcity – the economic organisation of
trolled social progress in order to administrative socialism leads to insur-
release humankind into justice. Charles mountable information and motivation
Fourier (1772– 1837), Philippe Buchez problems.
(1796–1866), Louis Blanc (1811–1882) The information needed for the
and others saw the basis of a socialist planning and control of the economic
society in the establishment of coopera- process is distributed among all the
tive partnerships for production and people working at different levels of the
communal living. government apparatus or in industrial
Scientific socialism, which dates operations and who have been tasked
back to Karl Marx (1818–1883) and with plan fulfilment.
430 Socialism/planned economy
However, no more than a small part Karl Liebknecht’s (1871–1919) idea of

of this information can be centralised unity of socialism and democracy. It
and thus made accessible to the nation- pursues – in contradiction to the anti-
al planning authorities. The result is a democratic currents of socialism – a
clash of interests, a principal-agent →third way between capitalism and
problem (→institutional economics): the administrative socialism, made possible
interests of the principal (planning by means of a parliamentary democracy.
authority) and the agent (enterprises) The 1959 ‘Godesberg Programme’ of
are antagonistic. the Social Democratic Party can be seen
As a solution, attempts have been as an example of this.
made to motivate the enterprises There are supporters of democratic
through financial incentives to put their socialism whose ideas are aimed at a
information into the service of plan ful- total change of the liberal social and
filment. But even while the plan is economic system; there are other sup-
made, enterprises are keen to give a dis- porters whose ideas are far removed
torted picture of their efficiency in from such intentions, but who also
order to be given easily achievable (soft) ‘lack an acceptable or stable concept of a
plans. Likewise, they will want to use political system and who end up getting
tried and tested production methods entangled in insurmountable contradic-
and avoid innovations, because new tions. Such ambiguities are usually sim-
production procedures are associated ply ignored, but they can easily turn
with the risks of change and the danger into crises engulfing not only the social-
of missing the operational planning and ist parties, but also the countries gov-
premium target. This clash of interests erned by them’ (Hans Willgerodt).
cannot be overcome. The result is the
universal predominance of soft operat- REFERENCES:
ing plans and budgets, comparatively GUTMANN, G. (1999), In der

low productivity and high levels of hid- Wirtschaftsordnung der DDR angelegte
Blockaden und Effizienzhindernisse für die
den →unemployment.
Prozesse der Modernisierung, des
Another insurmountable problem
Strukturwandels und des Wirtschafts-
of administrative socialism is an eco- wachstums, in: Kuhrt, E./Buck, H.
nomic structure based on the claim of a F./Holzweißig, G. (ed), Die Endzeit der DDR
group of rulers to be exclusively enti- – Wirtschaft – Analysen zur Wirtschafts-, Sozial-
tled and able to know all the true needs und Umweltpolitik, Opladen, pp. 1-60;
of the people, and to satisfy them with HENSEL, K. P. (1992), Grundformen der
the help of a state monopoly over the Wirtschaftsordnung. Marktwirtschaft, Zentral-
means of production. This restriction verwaltungswirtschaft, 4th edition, Münster,
of consumer sovereignty is one aspect Hamburg; WILLGERODT, H. (1985),
of a sweeping denial of human rights, Thesen zum ‘demokratischen Sozialismus’,
which also includes political, cultural in: Rauscher, A. (ed), Selbstinteresse und
Gemeinwohl. Beiträge zur Ordnung der
and religious freedom, and the freedom
Wirtschaftsgesellschaft, Berlin, pp. 229-277.
to enter into contracts and to engage in
trade and to travel. Alfred Schüller
Democratic socialism is linked to Thomas Welsch
Societal foundation of economic ethical principles’ (Eucken 1959,

orders p.132). At the same time, his call for a
‘functional and humane order’ (ibid.,
National economies are organised sys- p.21) for the modern economy recog-
tems. A →market economy, which by def- nises the determination of the nature of
inition is mostly self-regulating the economic sub-system by society.
through the price mechanism (→market The economic institutional order is
mechanism), is structured by a number not simply looked at as a materially effi-
of organisational principles which have cient mechanism but is also to be
a coordinating and behaviour-chan- shaped by and for man. This means that
nelling effect on economic agents (buy- social values have to be taken into
ers and sellers in the marketplace). account regarding the processes of a
Considered from this angle, real-life particular economic system and its
economies appear under this coordinat- practical implementation and shaping.
ing aspect as institutional orders. At the The most suitable economic tools for
same time, economies are partial sys- this purpose seem to be →institutional
tems (sub-systems) of society, the latter order policy and process policy. Institutional
being situated at a higher level com- order policy sets out the framework for
pared with the economic sector. Thus, economic processes, while process pol-
in the same way as society as a whole, icy can influence economic behaviour
the economic system embedded in it is directly.
characterised by a high degree of struc- In games theory terms, one might
tural and functional complexity. say that institutional order policy works
Apart from their feature as a struc- out the rules of the game while process
ture, economies also possess dynamic policy makes the moves. Whether a
and process-orientated characteristics. specific institutional framework of an
Structurally and functionally, economic economy is able to survive relatively
systems are mainly characterised by unharmed, probably depends on the
interrelationships with other sub-sys- quality and degree of interdependence
tems of society. These include relation- with the other sub-systems of society.
ships with the political, social, legal and At the same time, interdependence
cultural systems. However, no unilater- is an indicator of the fact that economic
al dependency of the other sub-systems institutional orders are not static and
from the economic system can be unchangeable, but, in their specific
assumed, as one is dealing with mutual form, are subject to ongoing dynamic
dependencies. development.
The ordo-liberal systems theoreti- The inevitable evolution of institu-
cian Walter →Eucken coined the term tional orders is in the focus of the mod-
‘order interdependency’, through ern institutional order theory by mak-
which he wanted to express the mutual ing recourse to evolutional approaches.
interrelationships of the economic sys- Through these, it is possible to analyse
tem with all other spheres of life. aspects such as ‘path dependencies’ of
Eucken expected the overall system to development. In the New History of
‘enable man to live life according to Economics, the transformation of the
432 Societal foundation of economic orders
economic institutional set is seen as part standards, count among the institu-
of a general transformation of the insti- tions.
tutional framework of society. In partic- In order to make rules and regula-
ular, the analysis of incentives for eco- tions universally binding in the eco-
nomic action is used for the interpreta- nomic sphere, they have to be enforce-
tion of the transformational change of able, i.e. they have to be invested with
the development of the economy and the power of sanctions. This clearly
its institutional orders. shows the mutual interdependence of
Research on the transformation of the economy and the state (the legisla-
economic systems accepts that changes ture and the executive) as well as the
of economic institutional orders are legal system (the judiciary). But the
usually accompanied by reforms in close relationship with the dominant
other social sub-systems, or in fact moral code in an economic community
become possible only thanks to those becomes obvious. Even without being
changes. This was made evident by the officially embedded in law, this still
collapse after 1989 of the political struc- controls human behaviour.
tures in the German Democratic In recent years, there has been a
Republic and in the Central and East revival of thinking in economic styles.
European countries. The concept of economic style, which
→Institutional economics puts special was introduced by A. Spiethoff and W.
emphasis on the society-linked founda- Sombart, is more focused on the socie-
tion of economic structures. This is tal foundation of the economy than on
achieved through an in-depth analysis the concepts of economic order and
of institutions, with the intention of economic system. Economic style is the
demonstrating their stabilising influ- actual realisation of a system that tends
ence on the order of society. to be so diversified and multifaceted
Institutions control, coordinate and that a deeper understanding can be
channel human behaviour by stabilising reached only through an interdiscipli-
expectations; thus, for their part, they nary programme of research with con-
indirectly have an effect on the struc- tributions by economists, sociologists,
ture of the economy. political and cultural scientists and his-
Institutions are not exclusively or torians.
primarily organisations with a specific It must also be mentioned that the
material and personal structure; equally, German concept of the institutional
rules and standards for human conduct order of a →social market economy was
are considered institutions. Formal designed by Alfred →Müller-Armack as
rules of conduct are the constitution, the blueprint of an economic style
the legal system, the economic order whose wide interdisciplinary range can
and contracts. Informal rules of con- accommodate in equal measure the
duct are given by a shared culture, principles of a market economy and the
including language, history and ideo- values of →social justice and social bal-
logical attitudes. However, traditions, ancing (compensation).
social and individual customs and
moral concepts, as well as norms and
REFERENCES: limited to the 1 July 1991 to 30 June

CASSEL, D. (ed) (1999), Perspektiven der 1992 period. It was levied at 7.5% of
Systemforschung, Berlin; EUCKEN, W. income and corporation taxes. In real
(1990/1952), Grundätze der Wirtschaftspolitik,
terms, however, the charge amounted
6th edition, Tübingen; SCHEFOLD, B.
to only 3.75% of the annual tax debt,
(1994), Wirtschaftsstile, Vol. 1: Studien zum
Verhältnis von Ökonomie und Kultur,
since it was levied for only half of two
Frankfurt/M. calendar year tax periods.
In accordance with the legal regula-
Friedrun Quaas tions of the 1993 Federal Consolidation
Programme (or Solidarity Pact), the
solidarity surtax was re-introduced in
1995, but now for an unlimited period
Solidarity surtax of time. Initially the surcharge was
again 7.5%, but in 1998 it was reduced
With the financial reforms of 1955, the to 5.5% of both income and corporation
federal government was granted the taxes. On income tax, however, the sur-
power to impose surtax both on income charge is payable only by persons whose
tax and on corporation tax (Article annual income tax bills exceed s972 for
106(1)(6) of the Basic Law). Surtax can individuals or s1,944 for married cou-
be explained as a proportional levy on ples who are jointly assessed.
these taxes should there be a need to The solidarity surtax revenue
fund additional expenditure. It is true amounts to twice as much as when it
that the constitution restricts the was first introduced in 1991. The rev-
amount of this surtax, but there is no enue is stagnating partly due to the
time limit. Its introduction does not country’s low economic growth and
require the agreement of the Upper partly because of income and corpora-
House of parliament because it is a fed- tion tax reductions. The solidarity sur-
eral tax (→public revenue). tax is of significantly greater fiscal
So far, the German government has importance than the 1968 surtax. By
made use of this option on only two way of comparison, the average annual
occasions. The first was in 1968 and revenue raised by the surtax from 1968
was for the purpose of closing pre- to 1976 was 1.1% of the federal tax rev-
dictable budgetary shortfalls. A 3% levy enue, while since 1995 the revenue
was raised on the income tax and cor- from the solidarity surtax has amounted
poration tax. On income tax, this sur- to an annual average of 6.2% of the fed-
charge expired at the end of 1974, while eral tax revenue.
on corporation tax it expired only at the However, the significance of the
end of 1976. The second occasion was solidarity surtax is not restricted to tax-
in 1991 when an additional solidarity ation as it also affects the policy of dis-
surtax levy was imposed. The justifica- tribution (→distribution). Prior to its
tion in this case was the abnormal bur- introduction, the distribution situation
den on the federal budget after the was distorted, putting lower and middle
German reunification (→Reconstruction incomes at a disadvantage because the
East). The solidarity surtax was initially shortfalls of the pension and unem-
434 Solidarity surtax
Germany’s solidarity surtax revenue, 1991–2008

in s billion
1991 1992 1993 1994 1995 1996 1997 1998 1999
Amount: 5,4 6,7 0,1 0,8 13,4 13,3 13,2 10,5 11,3
2000 2001 2002 2003 2004 2005 2006 2007* 2008*
Amount: 11,8 11,1 10,4 10,3 10,1 10,3 11,3 12,55 13,2
* = estimate
ployment insurance in East Germany subsidies, unemployment pay and assis-

were not financed by all taxpayers col- tance and pensions) are not on the
lectively, but by West German contribu- agenda for the foreseeable future. If at
tors only. The solidarity surtax made it all, a reduction in transfers is on the
possible to redress this imbalance cards only as a result of labour market
through an increased involvement in policy (including fewer job creation
the settlement of the remaining finan- measures, changed entitlement to serv-
cial costs by higher-income groups and ices).
individuals not liable for social security The fact is that in the foreseeable
contributions (such as civil servants and future, the East German tax revenue
the self-employed). In this way, the East and social insurance contributions
Germans are themselves making an might not be sufficient to finance the
additional financial contribution to demands on the public budgets and the
→Reconstruction East. This fact is fre- social security system. By itself, howev-
quently overlooked. er, this is not necessarily a sufficient jus-
After more than 10 years of German tification for the continuation of the
unity, one may question how much solidarity surtax.
longer the solidarity surtax can be justi-
fied. It is true that starting from 2005 REFERENCES:
the Solidarity Pact II made provision for HEILEMANN, U. et al (1994),

further supplementary financial assis- Konsolidierungs- und Wachstumser-
fordernisse. Zu den Fiskalperspektiven und
tance for the East German states from
– optionen der Bundesrepublik in den
the federal government – particularly
neunziger Jahren. Untersuchungen des
for the purpose of removing infrastruc- Rheinisch-Westfälischen Instituts für
tural supply deficits – but these were Wirtschaftsforschung (RWI), 13, Essen.
due to be scaled down to s10.5 billion
in 2005, s8.7 billion in 2010 and s2.1 Ullrich Heilemann
billion in 2019. A comprehensive Hermann Rappe
adjustment-based reduction of general
net transfers (→public expenditure) and
social security transfers (such as for rent
Speculation 435
Speculation between purchase and selling price, less

the financing costs (interest) for the
Speculation is aimed at using commod- respective period. However, in the
ity price fluctuations between two dif- event that the price does not rise at all
ferent points in time to make a profit. or not enough to cover the interest, the
The uncertainty about whether prices speculator suffers a speculative loss.
will actually move in the anticipated Speculation on falling prices (in a
direction is part of speculation. The bear market) is possible by selling short:
most suitable commodities for specula- the speculator sells a commodity which
tion are those whose prices tend to fluc- he/she does not possess in the hope that
tuate strongly, such as shares, foreign by the delivery date its price will have
exchange, derivatives and standardised fallen below the agreed price and that
goods traded in commodity or com- he/she can buy it at a speculative profit
modity futures exchanges (including on the agreed future date and fulfil
grain, precious metals and raw materi- his/her obligation. Forms of forward
als). speculation include options, where, on
Speculation must be distinguished the maturity of the option and in return
from arbitrage, which uses different for a fee agreed in advance, one of the
prices for a commodity at two different contracting parties has the right to
places. In certain cases, however, specu- decide either in favour of or against
lation and arbitrage can coincide. The exercising the deal.
medieval long-distance trader who was Speculation has many critics. Profits
exploiting the price difference for an from speculation are considered as
item between two places, was also spec- unearned income and speculators are
ulating on the fact that this price differ- seen as gamblers who profit from the
ence would still apply after the often losses of others. Claims have also been
lengthy transport of the item from the made that speculation is the cause of
place where the price was low to the price fluctuations. However, specula-
place where it was higher. However, tion plays an important macroeconom-
investments in, for example, shares are ic role, such as in the temporary flatten-
not speculation as the long-term share ing in the price development of com-
investor does not speculate on short- modities that are subject to speculation.
term fluctuations of stock exchange Speculators will make a profit in the
prices but partakes in the profit growth long run only if they buy at low prices
of listed →enterprises. The performance (and cause the price trend to go up due
of a widely distributed portfolio of stan- to this demand) and sell at high prices
dard shares takes place gradually over (and cause the price trend to fall
time – short-term price spikes notwith- through this offer). However, someone
standing – and is very steady. who despite prices which are already
A spot speculation is the purchase of high continues buying in the expecta-
a product now in the hope that the price tion of further price increases, thus
will rise in the future (in a bull market). stoking up the bull market, or who
If the price increase occurs, the specula- despite low prices, continues to sell
tor’s profit consists in the difference thus speeding up the drop in prices, will
436 Statistics
on average obtain no profit from specu- lack of economic knowledge and fore-
lation and will have to leave the market. sight of amateur speculators, in combi-
As a rule, successful speculation nation with the herd instinct of people
tends to absorb price fluctuations, who copy others blindly and are just
rather than being their cause. When hangers-on. This is a phenomenon that
prices do not form independently – is occasionally consciously exploited.
such as when the exchange rate is fixed
(→currency system and exchange rate REFERENCES:
regimes) – and has to be protected in the MAENNIG, W./ WILFLING, B. (1998),

foreign exchange market through inter- Außenhandel: Theorie und Politik, Munich, pp.
329ff.
ventions by the issuing bank (purchase
or sale of foreign currency in order to
Franz-Josef Leven
sell or buy own currency) – speculation
can have a destabilising effect. Here,
speculators can make a profit if they sell
an overvalued currency and buy an Statistics
undervalued currency (international
currency system). As soon as the issuing Without general statistically derived
banks give in to the market pressure information about society, economics
and adjust the exchange rate, the specu- and the environment, governments
lators have secured a profit equivalent cannot act. The German Federal
to the exchange rate adjustment. Constitutional Court judgment on the
It is more likely that the destabilisa- 15 December 1983 census stated that
tion is due to an exchange rate fixing statistics create ‘an indispensable back-
that runs counter to the market, than to ground for the design of a national pol-
the speculation which actually forces an icy which is based on the concept of the
adjustment of the exchange rates in the social state’. In this sense, it points the
direction of equilibrium. ‘way into reality’.
In the short term (a frequent occur- Here, the Federal Statistical Act
rence in economic history), speculative (1953) plays a key role. It was one of the
bubbles can make prices overshoot by a important elements of creating an insti-
long way over the long-term average. tutional order of the early post-war
Typical of bubbles is the hysteria of period – on a par with the German
inexperienced or amateur speculators Federal Bank Act (1957), the Act
who ignore not only the economic cri- Against Restraints of Competition
teria for the value of a commodity, but (1957), the Foreign Trade Act (1961)
also the great effort institutional and the law establishing the European
investors make to predict and utilise Economic Community (EEC) (1957).
short-term exchange rate fluctuations. It is therefore also called the Basic Law
After a bubble has burst, equally of Federal Statistics. It is a sign of the
extreme price drops are just as frequent quality of this law that in nearly 50 years
before normal price levels and fluctua- it has had to be amended only twice (in
tions return. The bubbles are ultimate- 1980 and 1987).
ly not caused by speculation but by the This law specifies the position and
Statistics 437
functions of the Federal Statistical ever, be impossible – or at least very dif-

Office (FSO). Its functions include the ficult – for people to live together in an
methodological and technical prepara- orderly fashion if there were not only
tion of federal statistics so that uniform different concepts of the common good
results for the whole of Germany but even different views on the reality
become available. Beyond this, the fed- to which these concepts refer. It is
eral results are collected and published. therefore helpful if the political discus-
The FSO regulates the arrangement sion about the social and economic
of statistics and appoints a statistical reality is based on a uniform statement
advisory board made up of representa- of facts.
tives of the public, including individu- In Germany it is widely accepted
als who make use of statistics and that official statistics are not subject to
others who serve as sources of informa- political direction. They are, rather, an
tion. Due to the universal validity of the objective method of collecting informa-
law, no exceptions or privileges are per- tion and are removed from politics. The
missible where access to statistics is results of statistical surveys are there-
concerned. fore not a subject of the political discus-
Statistical surveys frequently sion but its precondition. For example,
infringe on the personal rights of the the components of the wage-fixing for-
individual, and citizens certainly often mula that trade unions apply – the cur-
experience them as a nuisance. This rent wages, the inflation rate and the
interference is permitted by a law productivity trend – are concrete statis-
which clearly defines the rights and tical data in collective bargaining and
obligations of those concerned during a are undisputed. This remains the case
survey. although the clashes of interests
Of key importance here are the between trade unions and employers in
obligations of individuals to give infor- the realm of wage negotiations are more
mation, and of the statistical offices to extreme than they are in any other sec-
keep individuals’ information secret. tor of society.
The refusal to give information is pun- In this way, official statistics can
ishable as an infringement of the law, make an important contribution to
while violation of professional secrecy social harmony. In a society where there
by the FSO is a criminal offence and is no longer a fundamental consensus
punished as such. Specialised statistical on the basis of religion or philosophical
surveys are also in most cases subject to concepts, statistics can at least ensure
federal laws. basic agreement on social facts.
If the result of an official statistical An important reason why statistics
survey is the indispensable background are so widely accepted today is that they
for government action, it is also an ele- are no longer exclusively seen as an
ment of the public opinion forming instrument of public administration.
process. Anyone can find statistics that Originally, they used to fulfil certain
suit their purpose, since a large number administrative functions.
of statistical surveys are carried out To combine individual statistical
under private initiative. It would, how- data in a ‘programme’ was unheard of:
438 Statistics
there was no comprehensive, general Through official statistical data, the

concept, but only a variety of single sta- government contributes to the trans-
tistical surveys which had been carried parency of the market. With the expan-
out for specific public administrative sion of statistics, the creation of a statis-
reasons. tical overview of both the economy and
The universal increase of govern- society and the existence of the FSO,
ment involvement, specifically within important elements of statistics have
the economic and social sectors, been brought to life and integrated into
brought with it an expansion of statisti- the national infrastructure. These rep-
cal activities. resent everything that is required for
In countries and societies with a the permanent material, institutional
high level of administration, the official and personal basis of a properly func-
statistical involvement in these same tioning economy based on division of
areas is accordingly extensive. It is labour.
understandable that the government This is why statistics are comparable
wants to put its administrative proce- to the transport system and the media,
dures on record, even if just in order to to provision and disposal, and to the
account for its activities. educational, health and social security
The ongoing progress of statistics systems, in that they are accessible to
created the necessary conditions for a everyone – to politics, interest groups,
statistical overview of economy and the economy and science.
society. This was helped by the estab- In order that they can play the role
lishment of the FSO. The introduction of an informational infrastructure, sta-
of national accounting, which was tistics also have to fulfil other important
aimed at working out macroeconomic conditions: statistics alone serve the
relationships, accelerated this process. purpose of a society-related, economic
Statistical gaps had to be closed, defini- and social statement of facts. If there
tions and systems had to be standard- were the slightest suspicion that official
ised, and the programme had to be statistics were politically close to gov-
expanded. ernment, their function as an accepted
As statistics were developing fur- part of the country’s infrastructure
ther, the accumulated information would be in danger.
started to become interesting for the Lastly, statistics have to be tuned to
private sector as well as the administra- the needs of the public. This means that
tive sector. As a consequence there was the statistical programme is not drawn
a demand for government statistics for up once and for all. Rather, it has to
business use. The reaction from the adjust its emphases to a developing
FSO was also to supply objective data society while at the same time project-
for sectors of the economy where the ing a comprehensive and consistent
government itself does not want to get image of that society.
involved, or where the planned or
implemented government measures do
not really require an extremely detailed
economic picture.
REFERENCES: varied concepts of economic policy:

LIPPE, P. M. von der (1996), Wirtschafts- some activists are pursuing the creation
statistik, 5th edition, Stuttgart; UNGERER of an appropriate and necessary regula-
A./HAUSER, S. (1986), Wirtschaftsstatistik als
tory framework that allows private ini-
Entscheidungshilfe, Freiburg i. Br.
tiative to flourish in a manner which
brings maximum benefit to the society
as a whole (such as policies that stabilise
the currency, and policies on competi-
tion, private property and the environ-
Structural policy ment), while others want to eliminate
or disable market forces (such as meas-
The term structural policy is used in ures that undermine the market and
different ways. Frequently, it is simply limit competition; protectionist meas-
understood as the structural policy in ures favouring specific industries; the
the different regions and sectors. The policy of granting subsidies; govern-
following discussion deals with these ment interventions that influence
two political aspects. With reference to investments; and rules, prohibitions or
the economy, however, the term applies massive discriminating financial incen-
to all political areas, particularly to those tives or penalties).
of income and →wealth accumulation When structural policy is men-
policies as well as to →labour market poli- tioned, it should therefore be ascer-
cies. tained exactly which (possibly biased)
Whenever the structure of econom- objectives are pursued with which
ic phenomena and their organisation by measures (often opposed to the mar-
the state is at stake, the actual issue is ket). In the political battle of opinions,
structural policy. the true motivation of political meas-
It may seem confusing that struc- ures is frequently disguised and precar-
tural policy is associated with the most ious economic policy interventions are
German employment by industry sector, 1882–2005

440 Structural policy
presented as harmless (→intervention- structures. Pressure from organised

ism). groups, including trade unions, and
Regional structural policy continues concerns about job losses frequently
to be seen as harmless. The ‘Joint Task: motivate politicians to try to save
Improvement of the Regional shrinking industries.
Economic Structure’ is primarily aimed As the history of coal mining and
at decreasing the location disadvantages the railways shows, the measures which
of rural areas and numerous border preserve structures are extremely costly
zones. The EU has established several for the taxpayer and, in the long run,
structural funds which are supposed to only delay adaption but never prevent
help the most disadvantaged and back- it. The support of structural preserva-
ward regions to catch up. The most tion is definitely short-sighted. But cer-
important aspect is the development of tain aspects of structural policy in the
the economically relevant infrastruc- different sectors are indeed directed at
ture (transport routes, energy and water the promotion of structural change.
supply, development programmes for Occasional claims are made by
industrial areas), followed by invest- politicians that they know better than
ment incentives and subsidies (→EU: →entrepreneurs (who are alleged to be
regional and structural policy). thinking only in the short term) which
Particularly in East Germany, sectors of the economy will progress
regional structural policy measures rapidly and should therefore be pro-
were, and partly still are, essential. But moted with product-orientated
it must not be forgotten that ongoing research subsidies (structural policy
financial incentives can produce an with foresight). Such statements have
unhealthy reliance on government regularly been proved wrong and pre-
assistance (mentality of entitlement), sumptuous, while, on the other hand,
which can lead to distorted competition the development of promising indus-
and create the need to grant similar tries such as genetic engineering and
assistance to regions which were previ- nuclear technology has been greatly
ously left out. hampered for political reasons.
Regarding the development of There is nothing to be said against
transport routes, the biased support for the intensified promotion of basic
→public enterprises (such as loss-making research and more future-orientated
railways) and the deliberate acceptance training in skills that are in short sup-
of deficiencies in other transport net- ply; this is something that has largely
works for ideological reasons have to be been lacking in the past. In all other
highlighted as a misguided attitude in respects, structural policy in the differ-
regional structural policy. ent sectors should concentrate on the
Paradoxically, as far as the different removal of obstacles to progress in
sectors are concerned, the structural promising industries (restricted entry
policy that is supposed to accompany and government regulations). The pro-
and promote the constant structural motion of structural change also
change of the economy has predomi- includes the phasing out of complex
nantly the effect of maintaining existing and lengthy licensing procedures for
Subsidies, government assistance 441
new companies and larger investment Subsidies, government

projects. assistance
Furthermore, constant extensions to
the →co-determination regulations and In the context of the social market
increasing government control of the economy, it is the duty of the govern-
job market and of employment con- ment to fight any aberrations which
tracts, add up to an economically unde- may occur in the process of implement-
sirable restriction of the personal rights ing this system. Four weaknesses
of disposal. The direct result is a should be specifically listed:
reduced inclination to start new busi-
nesses and create new jobs. • The accumulation of economic
One would be mistaken in conclud- power in the hands of a few econom-
ing from the above criticism that it ic agents, which interferes with com-
would be best to do without regional petition.
and sector-related policies. There is no
doubt that structural policy is desirable • Interference with the price formation
insofar as it boosts economic progress process through the production or
in the long run. And one cannot object consumption of goods that generate
to →social policies that make the conse- external effects in the form of exter-
quences of structural change more nal costs (such as unredeemed dam-
bearable – as long as these are imple- age to the environment) or external
mented for a limited length of time. All benefits (such as lasting services in
other basic conditions for economic the public interest which remain
activities should be designed in such a unrewarded).
way that effective incentives for struc-
tural changes can result. • The emergence of an income and
wealth distribution which is seen as
REFERENCES: unfair and a potential cause of social
PETERS, H.-R. (1992/2000), Wirtschafts- conflict.
politik, Munich; MOLITOR, B. (1990),
Wirtschaftspolitik, Munich; HAMM, W.
• The failure to reach general econom-
(1979), Freiheitsbeschränkung durch
ic goals (a high level of →employment,
staatliche Struktur- und Forschungspolitik,
Ordo Jahrbuch, 30, pp. 423-439.
→price level stability, →balance of pay-
ments equilibrium and constant and
Walter Hamm appropriate economic →growth).
In order to fulfil these tasks, the

state uses – apart from numerous other
instruments – transfer payments to
enterprises (subsidies) and private
households (allowances, social trans-
fers). These transfers (subsidies) are
selective concessions without an ade-
quate market-related return and are
442 Subsidies, government assistance
granted by the public finance authori- the economy; these subsidies are
ties (→Federal Republic, federal states, important prerequisites for the crea-
municipalities and the →EU) to recipi- tion of equal living conditions.
ents outside the government adminis-
tration. • The structural policy that focuses on
The main reasons why subsidies are company size (→middle class policy). It
granted to →enterprises belong to three tries to balance potential competitive
areas: disadvantages of small and medium-
sized enterprises compared with large
• The →structural policy in the different enterprises. In the right circum-
sectors that has the function of soft- stances, this sort of adaptation to
ening the impact of the economic technical and economic change
change (structural →unemployment) makes the economy more competi-
and accelerating the structural change tive in general.
necessary for economic growth.
The government has a number of
• The regional structural policy that subsidy instruments at its disposal for
concentrates on the distribution of the fulfilment of the respective tasks.
the production potential and the Their implementation has different
infrastructural development within (budget-related) consequences for the
Development of financial aid and tax relief measures of the

German federal government, 1970–2004
in s million
1970 1980 1990 2000 2004
1. Consumer protection, food and agriculture 2,431 1,878 2,947 1,872 1,600
2. Trade and industry (without transport)
2.1 Mining 272 1,323 1,699 3,991 2,233
2.2 Efficient use of energy and renewable
energy sources 10 142 102 68 252
2.3 Technology and innovation subsidies 77 269 273 394 434
2.4. Aid for specific sectors of industry 88 345 775 139 84
2.5 Regional structural measures 1,049 2,172 3,659 2,023 1,786
2.6 Trade and industry in general 395 433 923 4,918 5,818
3. Traffic 463 1,261 1,009 970 1,188
4. Housing 670 1,975 2,355 6,295 6,365
5. Savings incentives and asset formation 1,378 1,964 620 613 595
6. Other financial aid and tax relief measures 309 742 771 1,862 1,938
Exemptions of ecological tax reform 0 0 0 3,252 5,613
Sum total 1. to 6.without exemptions of

ecological tax reform 7,142 12,504 15,133 23,145 22,293
Sum total 1. to 6. 7,142 12,504 15,133 26,397 27,906

public finance administration. They For political reasons, clear dividing

include: lines between these groups are not
always desirable. This is also why noth-
• rules and prohibitions in favour of ing is ever done about the constant and
third parties without a direct impact ubiquitous demands for subsidies to be
on the government budget (such as phased out.
import regulations);
REFERENCES:
• financial assistance, such as in the BUNDESMINISTERIUM DER FINAN-

form of subsidies, refunds or assis- ZEN (ed), Bericht der Bundesregierung über die
Entwicklung der Finanzhilfen und
tance with the servicing of debts,
Steuervergünstigungen für die Jahre 1987 bis
which are reflected on the expendi-
2000 gemäß §12 des Gesetzes zur Förderung der
ture side of the public accounts; and Stabilität und des Wachstums der Wirtschaft,
jüngst: 18e Subventionsbericht, BTag Drucksache
• tax relief, such as in the form of tax 14/6748; DICKERTMANN, D/ DILLER,
allowances, special deductions or tax K. D. (1990), Subventionswirkungen –
rate reductions, which result in rev- Einzel- und gesamtwirtschaftliche Effekte
enue losses for the budget. der Subventionspolitik, in: Wirtschaftswissen-
schaftliches Studium, 10, pp. 478ff.; NIEDER-
In principle, in a social market econ- EICHHOLZ, M. (1995), Die Subventions-
omy such subsidy payments are granted ordnung – ein Beitrag zur finanzwirtschaftlichen
exclusively in accordance with the sub- Ordnungspolitik, Berlin.
sidiarity principle as ‘help to help one-
Dietrich Dickertmann
self ’, since they are basically opposed to
Annemarie Leiendecker
the processes of a free market. On the
one hand, subsidies put their recipients
in a privileged position relative to those
economic agents who are not granted Supervisory offices
any subsidies (discrimination effect).
On the other hand, the taxpayer has to The public sector – as responsible for
carry the financial burden of the grant- economic policy – also has the task of
ing of subsidies (redistribution effect). supervising the economy. This is a sys-
In principle, these effects would be less tem-inherent task in markets, where
significant if subsidies did not exist. uneven results are anticipated due to
The bi-annual subsidy report which suppliers and consumers not being
is submitted by the federal government equally well informed about the mar-
classifies the relevant payments accord- kets. The state therefore intervenes by
ing to how they affect the market sup- means of regulations and supervisory
ply, namely: offices, which function as control insti-
tutions. The aim of this form of eco-
• assistance with productivity; nomic policy is to serve the welfare of
• assistance with restructuring; and all by influencing the autonomous pri-
• assistance with maintenance (preser- vate economic activities of households
vation). and →enterprises through specific, legal-
444 Supervisory offices
ly binding directives and general condi- economic supervision starts. The aims
tions. These are considered necessary in of economic supervision encompass the
order to reach and secure the function- protection of a minor contracting party
ality of certain markets, both economi- (such as an insurance client), ensuring
cally and in their social effects. that individual enterprises fulfil their
Supervisory offices have been given commitments (for example, hygiene in
the task of controlling, correcting and restaurants), dealing with structural
sanctioning. In this context, the legisla- aspects of an entire industry (permis-
tor has to develop a set of rules and sion or prohibition of the formation of
rights. Only in this way can the aims, cartels, →Federal Cartel Office) and even
means and standards of interventions protective measures against general
be made predictable and measurable for threats to the economy (control of the
the economic agents concerned, and financial markets).
the same goes for the actions of the The economic supervisory system is
supervisory offices (constitutional state not a uniform, comprehensive, clearly
principle). defined organisation. Owing to the
Areas under economic supervision diversity of its functions, this would
(not to be confused with the state con- hardly be possible. The fact is that the
trol over →public enterprises, which are supervisory powers and the actual exe-
likewise subject to economic supervi- cution of the tasks have been distrib-
sion) were, or are, for example: phar- uted among several partially overlap-
macies, banks, the retail trade, the ener- ping authorities. Everything revolves
gy industry, forestry, the food trade, avi- around the federal supervisory offices,
ation, transport, insurance schemes which are the centre of the organisation
(industry-bound specialised supervi- and are of great significance in terms of
sion); industrial safety, the calibration economic policy. These have the status
system, emission control (special super- of independent federal authorities
vision); and cartels, prices and taxes within the Federal Ministry of Finance.
(general supervision). They deal with the financial markets
This list clearly shows that there are and are divided into the Federal
areas of supervision which are cate- Supervisory Office for Insurance, the
gorised depending on the sector or Federal Banking Supervisory Office
industry in which they fall, while there and the Federal Securities Trading
are also general areas of supervision Supervisory Authority.
within the economy as a whole. There The classical and most enduring
is definitely a tendency for economic economic supervision (since 1901) is
supervision to become part of every applied to insurance. The legal basis is
aspect of the economy. These legally the Act on the Supervision of Insurance
specified areas of supervision are as Companies (1931; amended repeated-
diverse and dissimilar as the actual tasks ly). By granting insurance special status
involved. because of its social significance,
The monitoring, and when neces- because it needs to be trustworthy and
sary correction, of the behaviour of the because of its macroeconomic impor-
market participants is generally where tance, the Federal Supervisory Office
for Insurance (based in Bonn) is essen- tion of offenders involved in insider

tially pursuing two main aims: protect- trading.
ing the interests of the insured and, in Against the background of the fast
so doing, specifically guaranteeing that progressing financial market trend
the future obligations of an insurance towards a bancassurance market, and
company can be met at all times. due to the necessity of an organisation-
Supervisory measures include compul- al adjustment, what used to be the fed-
sory concessions, surety obligations, eral insurance, banking and securities
auditing and publicity, monitoring of trading supervisory offices were com-
the management and potential inter- bined in 2002, with all their existing
vention in the running of the business. functions being taken over by the newly
The credit system is under relative- established and legally autonomous
ly comprehensive supervision. Public Federal Financial Supervisory Author-
supervision of the banks, with general ity (all-finance supervision). This is
responsibility for the promotion of the expected to yield greater supervisory
stability of the financial institutions and competencies, synergy in the execution
the financial system, is predominantly of cross-sectional tasks and a general
performed by the Federal Banking stabilisation of supervisory efficiency.
Supervisory Office, also based in Bonn,
in cooperation with the German REFERENCES:
Federal Bank. SCHMIDT, R. (1988), Wirtschaftsaufsicht,

The legal basis for this supervision in: Albers, W. et. al. (ed), Handwörterbuch der
Wirtschaftswissenschaft, 9, unabridged student
is the German Banking Act (1961;
edition, Stuttgart, among others, see pp. 34-
amended several times). Public super-
44; BUNDESANSTALT FÜR FINANZ-
vision of the banks is specifically DIENSTLEISTUNGSAUFSICHT (www.
intended for the correction of any flaws bafin.de).
in the credit and financial service sys-
tems that may endanger the security of Dieter Fritz-Aßmus
customer deposits, impair proper exe-
cution of financial transactions or cause
substantial disruptions for the national
economy. Supply and demand
The newest supervisory office, the
Federal Supervisory Office for Securi- When companies and households work
ties Trading, was established in out their business plans, they tend to be
Frankfurt in 1995. Its task is to rectify guided by self-interest. This means that
any shortcomings in the proper han- companies want to make profits while
dling of securities trading that may consumers want to satisfy their needs.
cause substantial disruptions to the The players try to realise these objec-
stock market. The Federal Supervisory tives in the market place. To this end,
Office for Securities Trading also mon- suppliers (such as of consumer goods or
itors the compulsory disclosure of listed labour) must go into business with the
companies, while a further important consumers. Thanks to the competition
function is the detection and prosecu- for consumers among suppliers, every-
446 Supply and demand
Price formation in a commodity market
Price
Surplus offer Supply
PA
PEquilibrium
PB
Demand exceeding supply Demand
Quantity
MEquilibrium
one is motivated to make offers capable higher a product is priced, the lower
of satisfying consumer expectations. In will be the demand for it (falling
effect, the more consistently a supplier demand straight lines).
is pursuing personal interests, the better The law of supply means, however,
consumer needs are served, and the that with rising prices, the quantity of
sharper the →competition for available the goods on offer normally also
business becomes. As with an ‘invisible increases (rising supply straight lines).
hand’ (Adam Smith), competition This is to be attributed to the fact that
brings about a situation where self- with rising prices it becomes easier to
interest serves the welfare of all by supply goods and at least break even.
ensuring a favourable consumer supply. And while relatively high prices
The fact that competition makes the encourage companies to offer large
coordination of a multitude of individ- amounts of goods, they do not normal-
ual plans possible, has led to the con- ly encourage consumers to buy them.
cept of the self-regulation of the free The consequence is that initially high
market economy. This can easily be prices result in an offer surplus (such as
demonstrated by looking at pricing in at price PA). This means that the quan-
the consumer markets. It is assumed tity on offer exceeds the demand. But
that there are so many different suppli- since the suppliers want to sell all their
ers and consumers that none of them products, they will undercut each
can determine prices on their own other’s prices in order to attract as
(polypoly). Both the supply of and much demand as possible to them-
demand for goods tend to depend on selves. This causes market prices to fall.
how these are priced (see figure). As a consequence, demand goes up (law
According to the law of demand, the of demand), while the supply gradually
goes down (law of supply). Prices gradually attract more companies to the
remain under pressure in this way until market, and the supply rises further.
the quantities on offer correspond to Growing supply and stable demand
the quantities in demand. This happens lead to a surplus, which in turn depress-
when prices are at Pequilibrium. es the equilibrium price below its orig-
If the supplier’s price is lower than inal level – to the benefit of the con-
this price (such as at PB), then demand sumer.
exceeds the supply. There is excess Beyond that, companies strive to
demand, although not all willing buyers reduce their costs. To this end, they can
can obtain the goods. As soon as the copy streamlined production proce-
suppliers notice this, they will use the dures from competitors (imitation) or
opportunity to increase prices. This will develop new, still more economical
decrease demand (law of demand), procedures (innovation). Profits can
while it becomes worthwhile for com- thus again be achieved with goods
panies to increase their supply (law of priced at a given level. However, in the
supply). long term, the competition forces the
The price increase continues until suppliers once more to pass on cost
again the price Pequilibrium is achieved. advantages to the consumer in the form
At the equilibrium price the equilibri- of price reductions.
um quantity of Mequilibrium is realised. This pricing through competition
Under stable supply and demand con- gives rise to a particularly efficient use of
ditions in the short term, this is the the limited supply of the factors of pro-
maximum turnover that can be duction. The production of goods that
achieved in this market: if prices exceed because of consumer appreciation
equilibrium prices, demand will fall, promise generous profits, is promoted.
and if prices fall below equilibrium By contrast, companies give up loss-
prices, the supply goes down. This making activities in order to be able to
means that equilibrium ensures an use the liberated factors of production
optimum supply of goods. more meaningfully. In addition, compe-
Prices are supposed to balance sup- tition ensures that the remuneration of
ply and demand and to convey the the factors of production is performance
scarcity of the product (balancing and related. Thus, market players are
signal effect of prices) to the market. To encouraged to help overcome the scarci-
achieve equilibrium in the short term, ty of goods as best they can (prices and
however, is not enough. The pursuit of their stimulatory and regulatory effect).
self-interest also leads to an increased
supply in the long term. REFERENCES:
Besides prices, profits, too, have a BARTLING, H./LUZIUS, F. (2002),

regulatory function. They result when Grundzüge der Volkswirtschaftslehre, Munich;
BÖVENTER, E. v. et al (1999), Einführung
prices exceed the costs of the supply.
in die Mikroökonomie, 9th edition, Munich,
Such →profits act as an incentive for the
Vienna; WOLL, A. (2000), Allgemeine
suppliers concerned to expand their Volkswirtschaftslehre, 13th edition, Munich.
production in order to realise even
higher total profits. In addition, profits Hans Peter Seitel
448 Sustainability
Sustainability Today, sustainability is a concept

that enjoys worldwide recognition.
This term was first used in forestry and This broad acceptance of finding an
started to spread in use in German- equilibrium between the interests of
speaking countries during the 18th and today’s and future generations, of pri-
19th centuries. It meant that no more vate and public interest, of North and
trees should be cut down than could South, nevertheless runs into difficul-
grow back. In the Anglo-Saxon world, ties when it comes to laying down prac-
John Locke (1632–1704) and John tical recommendations for action
Stuart Mill (1806–1873) were the fore- (→protection of resources, →environmental
runners of the sustainability debate. protection objectives) – at a national and
Locke urged that resources ought to be still more strongly at an international
used with future generations in mind; level.
similarly, Mill pleaded with his contem- The embedding of environmental
poraries to moderate their needs. and social clauses into the international
The contemporary view was cru- economic system is controversial and
cially influenced by the detailed report has so far succeeded only partially. The
compiled by the United Nations World implementation of environmental aims
Commission on Environment and (such as lowering CO2 emissions) is
Development Our Common Future encountering various obstacles.
(1987) (the Brundtland report). Nevertheless, increasing awareness and
The concept of sustainability rests concrete improvements can be seen.
on three pillars: ecological, social and Both in politics and in industry there is
economic. These all have to be consid- a growing, visible interest to lend sup-
ered. They are causally linked, which port to a sustainable economy in the
means that they are not exchangeable light of continually changing economic
and that they cannot be considered in conditions. If, in future, both politicians
isolation. Anything that is supposed to and consumers decide clearly in favour
be socially and ecologically sustainable of a sustainable economic, social and
also has to be economically viable; only ecological environment, a sustainable
then can social and ecological goals be economy will become a factor of com-
financed on a long-term basis. How- petition.
ever, an economic system that does not Since in a market economy, enter-
give sufficient consideration to social prises have to strive as much as possible
and ecological issues is undoubtedly to take investment decisions which help
putting the sustainable satisfaction of them fulfil demand preferences, the
needs of the present generation at risk – long-term realisation of sustainability
and, much more so, future generations. requires a lasting change in the priori-
Development is sustainable if it is ties of politicians, citizens and econom-
appropriate to the needs of the present ic agents.
generation, without endangering the This is why sustainability cannot
potential of future generations to look simply be prescribed in a democratic
after their own needs and to choose state under the rule of law and a market
how they want to live. economy. It remains a political and eco-
nomic policy task to modify the behav- tal suppliers of and private demand
iour patterns and to push them in this looking for a public service known as
direction – through means compatible ‘institutional regulations’. The eco-
with a democracy and a market econo- nomic constitution makes provision for
my. This also takes time, but impatience such regulations in many sectors.
is a poor counsellor. Examples are the regulations governing
property, enterprises, production and
REFERENCES: the market, as well as the social consti-
HAUFF, V. (ed) (1987), Brundtland Report: tution. The formal rules laid down for
World Commission on Environment and these jurisdictional areas are also
Development: ‘Unsere gemeinsame Zukunft’,
referred to as external institutions and
Greven; HAMPICKE, U. (1997),
represent an important element of the
Aufgeklärtes Eigeninteresse und Natur –
Normative Begründung des Konzepts
conditions for the location of an indus-
Nachhaltigkeit, in: Held, M. (ed), Normative try.
Grundfragen der Ökonomik, Frankfurt/M., pp. In an open economic system where
128-149; SENTI, R. (2000), WTO. System capital, labour, goods and services can
und Funktionsweise der Welthandelsordnung, cross national borders freely, the condi-
Zurich, pp. 294ff., pp. 696ff. tions regarding international competi-
tion for mobile factors of production,
Rolf H. Hasse and particularly investments, change
for the countries that set the rules.
Domestic investors are subjected to the
System(s) competition immobile public good ‘institutional
organisation’, which is tied to a nation-
Until the late 1980s, the term system al territory, but they are also mobile
competition was used to describe the market participants comparing invest-
→competition between democratic sys- ment conditions. If their opposition to
tems with free market economies, and unfavourable basic conditions remains
socialist systems with centrally planned unsatisfied, they have the option to
economies (→socialism/ planned econo- emigrate.
my). Today, it is used as a collective Emigration entails the relocation of
name for procedures and circumstances capital for investments and capital gain
associated with the system competition to a more favourable country and an
between democratic states based on increased demand for goods and servic-
→market economies. Institutional compe- es in this country. Looked at in this way,
tition, regulatory competition (regula- countries and their institutional regula-
tory federalism), competition between tions (systems) enter into competition
governmental judiciary and administra- with one another.
tive systems (inter-jurisdictional com- The core concepts of the new sys-
petition) and location competition are tem competition concern its incentive
also concepts in contemporary usage. structures and the corresponding
The issue here is the conditions and effects: in open national economies
consequences of exchange and compet- faced with the rising actual and poten-
itive interactions between governmen- tial emigration of economic actors,
450 System(s) competition
Global Competitiveness Index: 2006 and 2005 comparisons
2006 2005 2006 2005

Country/Economy Rank Score Rank Country/Economy Rank Score Rank
Switzerland 1 5.81 4 Azerbaijan 64 4.06 62

Finland 2 5.76 2 Colombia 65 4.04 58
Sweden 3 5.74 7 Brazil 66 4.03 57
Denmark 4 5.70 3 Trinidad and Tobago 67 4.03 66
Singapore 5 5.63 5 Romania 68 4.02 67
United States 6 5.61 1 Argentina 69 4.01 54
Japan 7 5.60 10 Morocco 70 4.01 76
Germany 8 5.58 6 Philippines 71 4.00 73
Netherlands 9 5.56 11 Bulgaria 72 3.96 61
United Kingdom 10 5.54 9 Uruguay 73 3.96 70
Hong Kong SAR 11 5.46 14 Peru 74 3.94 77
Norway 12 5.42 17 Guatemala 75 3.91 95
Taiwan, China 13 5.41 8 Algeria 76 3.90 82
Iceland 14 5.40 16 Vietnam 77 3.89 74
Israel 15 5.38 23 Ukraine 78 3.89 68
Canada 16 5.37 13 Sri Lanka 79 3.87 80
Austria 17 5.32 15 Macedonia, FYR 80 3.86 75
France 18 5.31 12 Botswana 81 3.79 72
Australia 19 5.29 18 Armenia 82 3.75 81
Belgium 20 5.27 20 Dominican Republic 83 3.75 91
Ireland 21 5.21 21 Namibia 84 3.74 79
Luxembourg 22 5.16 24 Georgia 85 3.73 86
New Zealand 23 5.15 22 Moldova 86 3.71 89
Korea. Rep. 24 5.13 19 Serbia and Montenegro 87 3.69 85
Estonia 25 5.12 26 Venezuela 88 3.69 84
Malaysia 26 5.11 25 Bosnia and Herzegovina 89 3.67 88
Chile 27 4.85 27 Ecuador 90 3.67 87
Spain 28 4.77 28 Pakistan 91 3.66 94
Czech Republic 29 4.74 29 Mongolia 92 3.60 90
Tunisia 30 4.71 37 Honduras 93 3.58 97
Barbados 31 4.70 – Kenya 94 3.57 93
United Arab Emirates 32 4.66 32 Nicaragua 95 3.52 96
Slovenia 33 4.64 30 Tajikistan 96 3.50 92
Portugal 34 4.60 31 Bolivia 97 3.46 101
Thailand 35 4.58 33 Albania 98 3.46 100
Latvia 36 4.57 39 Bangladesh 99 3.46 98
Slovak Republic 37 4.55 36 Suriname 100 3.45 -
Qatar 38 4.55 46 Nigeria 101 3.45 83
Malta 39 4.54 44 Gambia 102 3.43 109
Lithuania 40 4.53 34 Cambodia 103 3.39 111
Hungary 41 4.52 35 Tanzania 104 3.39 105
Italy 42 4.46 38 Benin 105 3.37 106
India 43 4.44 45 Paraguay 106 3.33 102
Kuwait 44 4.41 49 Kyrgyz Republic 107 3.31 104
South Africa 45 4.36 40 Cameroon 108 3.30 99
Cyprus 46 4.36 41 Madagascar 109 3.27 107
Greece 47 4.33 47 Nepal 110 3.26 –
Poland 48 4.30 43 Guyana 111 3.24 108
Bahrain 49 4.28 50 Lesotho 112 3.22 –
Indonesia 50 4.26 69 Uganda 113 3.19 103
Croatia 51 4.26 64 Mauritania 114 3.17 –
Jordan 52 4.25 42 Zambia 115 3.16 –
Costa Rica 53 4.25 56 Burkina Faso 116 3.07 –
China 54 4.24 48 Malawi 117 3.07 114
Mauritius 55 4.20 55 Mali 118 3.02 115
Kazakhstan 56 4.19 51 Zimbabwe 119 3.01 110
Panama 57 4.18 65 Ethiopia 120 2.99 116
Mexico 58 4.18 59 Mozambique 121 2.94 112
Turkey 59 4.14 71 Timor-Leste 122 2.90 113
Jamaica 60 4.10 63 Chad 123 2.61 117
El Salvador 61 4.09 60 Burundi 124 2.59 –
Russian Federation 62 4.08 53 Angola 125 2.50 –
Egypt 63 4.07 52
Source: World Economic Forum: Global Competitiveness Report 2006-2007
Tax policy 451
countries are subject to more intense REFERENCES:
competition. In the long run, they are MONOPOLKOMMISSION (ed) (1998),

forced to improve their performance. Systemwettbewerb (Sondergutachten 27),
Baden-Baden; STREIT, M. E./ WOHLGE-
Methodological individualists hold the
MUTH, M. (ed) (1999), Systemwettbewerb
view that one is dealing with competi-
als Herausforderung an Politik und Theorie,
tion between countries, which are rep- Baden-Baden; GERKEN, L. (1999), Der
resented by their politicians in the sense Wettbewerb der Staaten, Tübingen.
that it is ultimately a competition
between the politicians in their capacity Ronald Clapham
as representatives of a state.
Institutional improvements can take
the form of innovations or, alternative-
ly, imitations of regulations that have Tax policy
worked successfully abroad. The recip-
rocal service that the mobile market The important aspects of tax policy can
participants of a specific country offer is be defined by distinguishing between
their non-emigration from the national the sources of tax revenue and the dif-
territory of that country. ferent types of taxes, between direct and
The new analytical view of system indirect taxes within the tax structure,
competition widens both the older between tax load quota and the com-
model of political competition in pulsory charges quota, between tax rate
democracies by the option of economic and tax assessment base, and between
drift, as well as the analysis of the pub- taxpayer and tax-bearer.
lic choice theory regarding its effect on There are currently 46 different
political decision-making processes types of taxes in Germany. They all
(→institutional economics). draw from only one tax source – the
The controversy in the critical →income which the economic agents
debate about system competition is obtain from the utilisation of factors of
mainly whether institutional competi- production (land, labour, capital). To
tion can be seen as analogous to the that extent, any tax is income tax. The
economic competition in goods mar- fact that there are nevertheless more
kets. It still has to be clarified under than 40 ways of absorbing funds from
which conditions system competition this source is reflected in the five func-
can develop, and whether the danger of tions of taxation.
the ‘race to the bottom’ argument actu-
ally exists. It also still has to be investi- • The fiscal function: Taxes must be raised
gated whether the investors can actual- economically, with minimal adminis-
ly select individual regulations, whether trative costs.
there really is a high degree of mobility,
and whether and how the national gov- • The social function: The tax burden
ernments can prevent any threatening must be fairly distributed. Instead of
drift by collectively harmonising or the fuzzy concept of justice, econo-
standardising institutional regulations mists use the concept of taxation
(→international migration). according to the ability to pay.
452 Tax policy
• The economic function: Through taxa- each progressively higher income cate-
tion, it is possible to discriminate gory to a higher percentage than the
against and weight different kinds of preceding one. This explains the differ-
income creation and income use dif- ence between average tax rate (for the
ferently. entire taxable income) and marginal tax
rate (for the next highest income cate-
• The constitutional function: The autono- gory).
my of regional government authori- Tax on income emergence is direct
ties in the context of the →financial tax; tax on income use is indirect. The
constitution is reinforced by the powers tax structure indicates the relationship
of raising their own taxes. of direct and indirect taxation. Since
people should be motivated to earn
• The political function: The more differ- money rather than to spend it, the eco-
ent types of taxes there are, the less nomic function of taxation demands
clearly citizens are able to see what that the proportion of indirect taxes
exactly the tax burden on their must be higher. This also applies in
income is. A rational taxation system regard to the international location
can fulfil the first four functions with competition.
up to 12 types of taxes. The fact that Comparative international tax sur-
Germany has more than three times veys have to differentiate between tax
as many shows that the tax system is quotas and compulsory charges quotas.
in unequivocal contradiction to the In different financial constitutions the
democratic principle; to the principle same government functions are
that the government budget should financed in different ways, especially
be based on truth and clarity, and thus social security benefits, which are
on the principles of the →social market financed either through social security
economy. contributions or through tax. This is
why the financial commitment of citi-
The fiscal functions of revenue pro- zens is appropriately captured not
duction and administrative efficiency through the tax quota but through the
are fulfilled most effectively by taxing compulsory charges quota. However,
income use, as in the case of the sales this does not apply – and this has rele-
tax which was rearranged and became vance for investment decisions – in the
value added tax. This, however, is large- case of company tax.
ly a proportional tax (split tax rates For the calculation of the overall tax
counteract regressive taxation), and burden, the tax assessment base is just
thus does not take into account differ- as important as the tax rate. The tax
ent income-based capacities of taxpay- assessment base is dependent on deduc-
ers, which is achieved through the pro- tions and exceptions, basically any kind
gressive taxation of income emergence, of tax concessions (→subsidies). The fis-
the taxation of wages and income. cal policy-makers have a choice
Proportional taxes are charged at the between high rates and many excep-
same percentage for all income cate- tions or few exceptions and low rates.
gories. Progressive taxation subjects The more exceptions are made, the
Tax policy 453
higher the administrative expenses for tal tax. Either the tax fulfils its ecologi-
both government and citizens; trans- cal function and brings about behaviour
parency is lost, and the number of changes such as lower energy con-
wrong allocations grows. sumption (in which case, fewer and
Another argument in favour of low fewer government tasks can be financed
tax rates is that there is no linear rela- with the collected revenue), or the fiscal
tionship between tax rate and tax rev- function must be secured and the tax
enue. The higher the tax rate, the more revenue stabilised. This makes it unde-
keen taxpayers will be on developing sirable for the ecological purpose to
strategies of legal tax avoidance and ille- occur.
gal tax evasion. It follows that increased A lack of understanding of such
tax rates can lead to lower tax revenue – economic interconnections makes it
and vice versa. possible for the tax policy-makers to
The differentiation between com- mask the function of a specific tax.
pany tax and individual tax is necessary Right from the start of the Federal
and problematical at the same time. It is Republic, tax policy in Germany has
necessary because in the case of compa- been completely unsystematic and pre-
ny taxation, different taxes can add up dominantly guided by the political
and thus affect location decisions objectives of the day. This has also
unfavourably, particularly depending served to discredit the concept of the
upon the detailed form of corporate tax →social market economy. A successful
and local business tax. It is problemati- social market economy therefore
cal because the (politically influenced) requires a tax system which is charac-
impression exists that the lower income terised by:
groups are exempt from business taxes.
For a business, taxes equal costs. • the predominant taxation of income
Either the costs are covered by prices, use;
which are paid by the customers (in
which case a tax rollover takes place • a small number of different types of
which sees the customers carrying the taxes; and
taxes), or alternatively, taxes cannot be
rolled over on to the prices (in which • low tax rates with few exceptions.
case the businesses will stop production
and reduce their workforce). This REFERENCES:
shows that a difference has to be made HOMBURG, S. (2001), Allgemeine

between taxpayers and tax-bearers. Steuerlehre, Munich; BUNDESMINIS-
TERIUM DER FINANZEN (2002),
The concept of the ‘environment
Unsere Steuern von A-Z, Berlin;
tax’ can also send messages which are
SCHMÖLDERS, G. (1970), Finanz- und
economically wrong. This can be eco- Steuerpsychologie, Reinbek.
nomically required to internalise exter-
nal costs through taxation. If, however, Wolfgang Reeder
such a tax is used to finance running
government expenses, it will be a mis-
representation to call it an environmen-
454 Third ways: Mixed economy
Third ways: Mixed economy systematically used for political aims.

The point of reference of the system is
The ‘first way’ (→market economy) is the collective.
characterised by personally accountable In between, numerous attempts
individuals in the private sector who, have been made to turn a mixture of
on the basis of contractual freedom and collective and individual principles into
the right to private property (→proper- the point of reference for a system
ty), take responsibility for their deci- (hence ‘mixed economy’).
sions. The point of reference of the sys- After the Second World War, taking
tem is the individual. the second way as their point of depar-
The ‘second way’ – frequently also ture, the Yugoslavians experimented
called a centrally administered econo- with worker autonomy, and the
my – decides what (in line with a radi- Czechoslovak Socialist Republic and
cal, egalitarian, redistributive state) the Hungary with a synthesis of plan and
citizens, in the context of a socialist market.
political system of orders and appor- The ‘third way’, also referred to as
tioning, can and cannot do (→social- socialist market economies, relax the
ism/planned economy). Their scope of collective principle only up to the point
action has been comprehensively col- where the dominance of social or
lectivised on the basis of the nationali- national ownership of the means of
sation of the means of production and is production and the power monopoly of
Third ways: Mixed economy
First Way Third Way Second Way
1a. (Criterion: Individual or 2.

Free market economy collective principle) Centrally
administered economy
1b. Socialist variations

Social market economy
3b. 3a.
‘Synthesis of market and Constructivist market
plan’, creeping market socialism (Workers’ self-
socialism (welfare state) governing, ‘synthesis of plan
and market’)
Transformation point
the Communist Party could be in dan- social security contributions in order to

ger. redistribute them on the basis of politi-
The prevailing coordination of this cal criteria (→social policy). Where serv-
constructivist attempt to mix the collec- ices and their remuneration in the
tive principle with limited elements of economy are concerned, the equiva-
the individual principle has been lence principle is displaced by the con-
expressed in politicised, bureaucratic, cern for provision.
negotiated solutions (→constructivism) Typical organisational characteristics
averse to responsibility and innovation. of ‘market socialism by stealth’ are:
To be fair, compared to the rigid order
system of the second way, it looked like • the striving for egalitarian justice, col-
progress. lectives (federations, alliances for ...)
Taking the first way as the point of as points of reference for the political
departure, West Germany at the end of and economic system;
the 1960s started to develop ideas on
the ‘synthesis of market and plan’. • a strong dislike of competition and
These ideas, based on the nationalisa- deregulated prices; and
tion of key areas of the economy, repre-
sented a plan of economic control • a far-reaching nationalisation of the
designed to help the collective principle social security system.
to gain the upper hand by logic, in line
with the second way and through the The resulting modes of behaviour
progressive relaxation of the individual within the society are characterised by a
principle. It did not come to that, but profound lack of responsibility and
West Germany subsequently embarked misdirected incentives, a counter-pro-
on the third way (by stealth, as it were) ductive attitude of entitlement by the
via the emergence of the →welfare state. population towards the state, people
The democratic and Christian continually being ordered around by
socialists saw this as a goal, even as federations and government authori-
something of intrinsic moral worth, ties, a lasting disappearance of entrepre-
while the Marxist socialists understood neurial spirit, a growing loss of author-
it merely as a stop-gap en route to the ity on the part of the citizens towards
second way. At the first turn-off into the the state, and the loss of economic
third way, there are vote-pulling restric- organisation and executive power on
tions on the scope of action of private the part of the state.
enterprise through the nationalisation The boundaries between the first
of social issues, and justified by the and the second ways are blurred. The
claim to procure maximum equalisa- third way proves to be hollow verbiage,
tion of incomes. which – as is the case in present-day
Essential activities of people lose the German social security systems – is
character of privately organised fields of either meant to cover up the collectivi-
action and are politicised. Increasingly sation of the right to individual action
here, the state seizes the →income of and planning, or to justify – at best – the
individuals in the form of taxes and lack of acceptance of the first way.
456 Transport policy
REFERENCES: integrated national economy (→globali-

SCHÜLLER, A. (2000), Soziale Markt- sation), while remaining conscious of
wirtschaft und Dritte Wege, Ordo – Jahrbuch the different utility and cost compo-
für die Ordnung von Wirtschaft und Gesellschaft,
nents. The social aspects of a transport
51, pp. 169-202.
policy entail the creation of the most
Alfred Schüller
comprehensive network of transport
Thomas Welsch facilities possible for an area (regional
component), so that all citizens, inde-
pendently of →income and status, are
assured of access to means of transport
Transport policy (personal component). This focus on
the common good and the provision for
Transport policy includes all measures daily necessities usually overrides any
through which state institutions impact profitability criteria.
on the transport system of a national In the same way as any other policy,
economy. The transport system makes a transport policy requires systematic
it possible for people, goods and mes- legitimacy beyond mere political decla-
sages to traverse distances or to change rations of faith. In a democracy based
their locations. Transport policy also on market economy principles and
includes the requisite means of trans- which relies on the efficiency of the
port and the necessary infrastructure. democratic system, market coordina-
Examples of means of transport are tion and →competition, government
road vehicles, trains, aircraft and ships. interventions can be justified only if the
The transport infrastructure includes transport markets:
the transport routes – roads, the railway
system, waterways, stations, airports • exhibit functional deficiencies which
and signal boxes. result in an inefficient and unreliable
Owing to its strategic importance service for the citizens; and
for the economy and for the prosperity
of the entire population, but also to • despite being in good working order,
open up and integrate areas and over- produce results that do not satisfy the
come national borders, transport has demands of the population.
long been subjected to enormous and
extensive government interference. Transport-related functional defi-
Initially, this interference was politically ciencies can be related to infrastructure.
motivated and served to fulfil the wish- Here, it is often the case that one sup-
es and claims to power of the govern- plier is in a position to supply the entire
ment (→interventionism). Today eco- market more cheaply than several
nomic and social criteria are the deter- enterprises, so that parallel facilities are
mining factors of transport policy. not economical. This may, for example,
From the macroeconomic point of be the case where roads, railways or air-
view, provision has to be made for the ports are concerned, and a natural
mobility needs of a highly developed monopoly develops. But if the monop-
and internationally ever more strongly olist has no competition, he can charge
high, uncompetitive prices for inferior allowed to emit pollutants, so that an

quality and discriminate against some incentive exists to pollute less and thus
clients. In order to prevent this, the to save the money for certificates.
monopolist must be subjected to regu- Since the application of these
lations. instruments equally costs money – it is
Functional deficiencies may also true that the introduction of an envi-
arise if transport activities create expens- ronmental tax on petrol reduced the
es borne not by its producers but by traffic volume and thus the environ-
non-participant third parties. Such nega- mental impact – it also raises the price
tive external effects are often the conse- that has to be paid for mobility. One
quence of environmental damage, acci- therefore has to investigate in detail the
dents or time delays due to traffic con- extent to which people are prepared to
gestion. It is mainly road traffic that is carry damage-avoidance costs. But it
seen as causing this kind of external cost. also has to be considered that the exact
From the economic point of view, how- repercussions of transport are not yet
ever, the issue is not the abolition of the known, and environmental damage also
market; it is, rather, that market prices has numerous other causes.
must incorporate these costs as exactly as In principle, individuals may end up
possible. Suitable instruments would be in a situation where they or members of
regulations, taxes, negotiations between their families lack the financial means
the parties involved or tradable certifi- to use transport at market prices. But
cates (→environmental policy). since without mobility it is difficult to
Regulations can be used, for exam- participate in economic and social activ-
ple, to enforce environmental protec- ities, one may find that there is broad
tion measures (catalytic converter consensus on offering such persons the
requirement), whose costs signal to all chance to be mobile.
users that a clean environment has its Instruments that would achieve this
price. Similarly, taxes may be imposed could be a public supply of transport
on environmentally harmful conduct in services below cost – for example, for
order to create an incentive to limit the local public passenger services or the
damaging activities. Through negotia- appointment of private suppliers to do
tions, the party causing harm (such as the job, with the government covering
an airport as a source of noise pollution) the cost or providing direct financial aid
and the party being harmed (neigh- for needy persons (→subsidies, govern-
bouring residents) can agree on com- ment assistance).
pensation payments, and at the same The familiar drawbacks of govern-
time determine the degree of harm that ment involvement in business activities
those concerned are prepared to toler- – too much bureaucracy, lacking cost
ate. Tradable certificates are a limited awareness, insufficient inclination to
number of damage permits that may be innovate – suggest either that needy
traded in the market and each of which persons should receive direct financial
specifies an exact quantity of pollutants aid in order to use the privately sup-
(such as carbon dioxide). Only those in plied transport services of their choice,
possession of these certificates are or that private suppliers should be
458 Treuhand Privatisation Agency (Treuhandanstalt)
recruited through official tenders to economy. The Treuhand Privatisation

provide services for these groups. Agency (Treuhandanstalt) was established
The consideration of these princi- in 1990 and continued in reduced form
ples – and the experiences in other from 1995 as the Federal Institute for
countries (→EU: transport policy) – has Special Tasks Arising from Unification,
led to a transport policy that is now and was dissolved almost completely in
more strongly oriented towards free 2000.
market principles. The exaggerated The idea for its establishment came
quantity and tariff regulations for road from the Citizens’ Movement of the
haulage, air transport and inland navi- GDR at the time, and from the reform-
gation were abolished in the 1990s, communist Modrow government.
paving the way for more market-related Initially, the Treuhand was merely sup-
reforms of the state’s German railway posed to administer the enterprises that
enterprise, the →privatisation of airports had been transferred to it in order to
and the provision and maintenance of prevent spontaneous →privatisation and
road infrastructure. There is neverthe- to keep open a possible →third way. The
less still a substantial need for deregula- election of the democratic de Maizière
tion and privatisation, particularly in government in March 1990 and the
the railways and public local passenger subsequent reunification under the
services. This is the only way of achiev- Kohl government meant that the
ing an efficient transport policy that is Treuhand was given a new project: the
free of individual interests and that privatisation of the East German econ-
serves the well-being of all citizens. omy. This was an enormous task
because 4.2 million workers were
REFERENCES: employed in Treuhand enterprises. The
ABERLE, G. (1999), Transportwirtschaft, 3rd Treuhand had become the owner of
edition, Munich; HARTWIG, K-H. (1999), nearly all large-scale enterprises (com-
Marktwirtschaftliche Optionen der
bines) and of more than a quarter of the
Verkehrspolitik in Europa, in: Apolte, T./
hotels, restaurants and shops in East
Caspers, R./Welfens, P. J. J. (eds), Standort-
wettbewerb, wirtschaftspolitische Rationalität und
Germany. Almost one-third of the
internationale Ordnungspolitik, Baden-Baden, fields and arable land and two-thirds of
pp. 89-112. the forests had become its property, and
there was also a good deal of real estate.
Karl-Hans Hartwig During the privatisation process, the
Treuhand had to take the claims of other
owners into account, both from nation-
al institutions (communalisation) and
Treuhand Privatisation Agency from private persons whose property
(Treuhandanstalt) had been expropriated (re-privatisa-
tion). The privatisation of the banks
The Treuhand was the name of the and insurance companies as well as the
national privatisation organisation set monopolies in the power, gas, transport
up during the transformation of East and water sectors were special cases.
Germany from a planned to a →market Here the Treuhand was officially
involved, but the actual decisions were price; rather, it demanded commit-
taken by the responsible ministries or ments to jobs and investments, which
the government. had to be supported by detailed busi-
The Treuhand was an agency of pub- ness plans. Many potential buyers,
lic law – or a semi-independent author- especially from abroad, were put off by
ity – which reported to the Federal these conditions. In response, the
Ministry of Finance. It was organised in Treuhand reduced purchase prices, part-
the same way as a public limited com- ly restructured the enterprises or
pany. The board of directors (the super- offered →subsidies. By the end of 1994,
visory board) was made up of represen- most of the enterprises had been sold or
tatives of the federal government, the closed down. When Schröder’s govern-
East German states, as well as represen- ment came to power in 1998, there was
tatives of the important employers’ nothing left to do except privatise the
associations and trade unions. remaining real estate and land as well as
Experienced →entrepreneurs and econo- monitor long-term privatisation con-
mists were invited on to the board and tracts.
the executive committee. The most The Treuhand was a →parastatal. Its
important presidents (chairmen of the expenses amounted to over s155 billion
managing board) of the Treuhand were while its income was less than s40 bil-
Detlev Rohwedder (1990–1991), who lion. The high expenses were due to old
was the victim of a political assassina- company liabilities, the removal of envi-
tion, and Birgit Breuel (1991–1994). ronmentally dangerous refuse dumps
Large enterprises were privatised by and the restructuring of enterprises.
the Berlin head office and smaller The small returns were mainly the
enterprises through the 15 branches. result of the low value of the enterprises
Real estate was sold through the and price reductions in return for
Treuhand Real Estate Company and land employment and investment promises.
was sold through the Land Utilisation Debts to the value of just under s107
and Management Company. Initially, billion were transferred to the →Re-
the Treuhand had a staff of only about demption Fund for Inherited Liabilities. The
300, but during peak periods this remaining debts were covered by the
increased to 3,000. federal government’s annual budgets.
The Treuhand carried out its privati- The Treuhand was subject to con-
sations by converting state enterprises stant criticism. Some of the critics
into private companies (plc’s, limited demanded that it should privatise more
companies) and by dividing large-scale slowly, that it should first restructure
enterprises into 14,000 smaller enter- the enterprises and preserve an indus-
prises and selling them. However, these trial heartland, or that it should become
were no normal company sales, since the Ministry for Reconstruction East in
many of these businesses were on the order to save as many jobs as possible.
verge of bankruptcy, and the buyers Other critics demanded exactly the
were expected to fulfil special condi- opposite on the grounds that a slower
tions. The Treuhand did not therefore privatisation process would be even
auction its enterprises at the highest more expensive and that the Treuhand
460 Types of market economy
was no better an entrepreneur than the Types of market economy

private buyers. It became clear that the
Treuhand was not an independent The constituent elements of economic
authority whose sole purpose was car- and social systems are the ‘place of deci-
rying out privatisations. It was subject sion-making’ – decentralised (→enter-
to considerable political pressure from prises and households) or centralised –
the federal and state governments as and the ‘type of property’ – private or
well as →interest groups and the public, collective property. If we combine these
and it got caught up in the →conflicting elements, a matrix results (see matrix).
aims in economic policy. Basically, it was It must be remembered that a
the rule that the larger and the more socialist market economy and a capital-
decrepit the enterprise, the greater the ist centrally administered economy are
political pressure to embark on an either only mental constructs or tran-
expensive restructuring process. It was sient phenomena (e.g. in times of war),
also criticised that the Treuhand did not which with the passage of time will lean
participate in wage negotiations for its towards either the one basic type or the
enterprises. Particularly between 1990 other.
and 1991 it should have advocated Thus, in real life, there are princi-
slower wage adaptation in East pally only two basic types: →market
Germany (→Reunification: monetary, eco- economy or centrally administered econ-
nomic and social union). omy. They were considered stable; but
However, the Treuhand did its job, now this statement has to be modified
which was mass privatisation in East to relatively stable considering the fact
Germany. This did not happen auto- that socialist societies have collapsed. In
matically, as the experiences of other the case of Cuba, North Korea and
transition countries demonstrate. The China, one has to ask for how much
result is that on the one hand the longer their →socialism can survive.
majority of enterprises in East Germany If, while actual socialism was still a
are now private and have the potential reality, it used to be permitted to classi-
for further economic growth. On the fy economic and social systems as either
other hand, however, the privatisation ‘market economies’ or ‘centrally
process was not efficient. administered economies’, then today
the different types of market economies
REFERENCES: have to be considered. Here, too, we are
FISCHER, W./HAX, H./SCHNEIDER, H. simplifying if we distinguish four types:
K. (eds) (1993), Treuhandanstalt: Das
Unmögliche wagen, Berlin; KEMMLER, M.
• market economies without state
(1994), Die Entstehung der Treuhandanstalt:
interventions;
Von der Wahrung zur Privatisierung des DDR-
Volkseigentums, Frankfurt/M.; SIEGMUND,
U. (2001), Privatisierungspolitik in • market economies with state inter-
Ostdeutschland: Eine politökonomische Analyse ventions;
der Treuhandanstalt, Wiesbaden.
• market economies with overlapping
Uwe Siegmund state and private spheres of influence;
• formerly socialist economies which Germany today, one might say the
are becoming market economies – or opposite is the case. The question is
so-called transition countries. whether it is possible to do equal jus-
tice to both aspects?’
Taking these forms further:
• It is the goal of the →social market
• The United States is considered to be economy ‘to connect a competitive
a market economy without state economy which invites free initiative,
intervention (→interventionism). The with social progress, secured by a
economy is controlled almost exclu- productive market economy’ (Alfred
sively by prices and profits. State →Müller-Armack). An economic poli-
involvement is concentrated on infra- cy programme aimed at ‘prosperity
structure and basic conditions; pri- for all’ (Ludwig →Erhard) was sup-
vate initiative is given broad scope. posed to create a situation where citi-
The society rests on the principles of zens are less and less dependent on
individualism. At the same time, the state welfare service. The political
innovative drive and dynamism are →competition, however, meant that
strongly pronounced. If a person can- with growing prosperity and rising
not, and also is not supposed to, rely tax revenues the social system contin-
on the community, then the motiva- ued to be perfected and expanded.
tion for helping oneself is strength- The →social state deviated from the
ened. However, what about those path the people had been promised.
who are either unable or barely able The bureaucracy which grew out of it
to do this? Even if such a society is is channelling the political control
not necessarily anti-social, one can over other peoples’ incomes into the
still agree with the Nobel laureate hands of a few: this goes against the
Robert Solow: ‘My own country is ideas of liberty and equality, for
doing rather well, as far as the “mar- which the →political parties originally
ket part” is concerned, and badly, wanted to fight. The reality of the
concerning the “social part”.’ In social market economy is therefore to
Types of market economy matrix
Decision
Decentralised Centralised
Property
Private Capitalist market Capitalist centrally

economy administered economy
Collective Socialist market economy Socialist centrally

administered economy
462 Types of market economy
be revitalised in the sense of Ludwig • Countries that after the failure of

Erhard and Alfred Müller-Armack. socialism have to introduce a free mar-
When she was chief whip of the ket system, not only have to establish
Christian Democratic Union free market procedures in the different
(CDU), Chancellor Angela Merkel areas but also have to create the foun-
declared that she wanted to find a dation for a private legal system. After
new balance between demands and 40 years of socialism, only a political
the ability and/or will to be produc- Hercules can clear these Augean
tive in the ‘us-society’. Stables of perks, privileges and corrup-
tion. Experiential reports show that
• Ten years ago or more, Japan and this is precisely where the biggest
Southeast Asia were still regarded as problems lie. The opportunities to
future models for the European make a new start, too, are unequal and
nations, due to the assumption that unfairly distributed for many. The
the overlap of state and private sector type of person who feels most at ease
strengthens both the state (because it in the twilight zone between a market
can be sure of the economic strength economy and state intervention is the
of its enterprises) and the enterprises one who is almost completely without
(because their competitors in the scruples towards his/her fellow citi-
respective markets would not only be zens. The market economy, which is
dealing with an individual enterprise perceived as cold and inhuman, is then
but with the ‘System Japan’ or ‘Japan blamed for the money-making meth-
Inc.’). It is this very amalgamation that ods and exploitation used. Many peo-
is now considered a problem for Japan ple who used to be persistently and
and some Southeast Asian states since deeply sceptical about socialist systems
it has caused areas of responsibility to will often say today that the socialist
become blurred and the principle of leaders ‘always betrayed and deceived
liability to be passed over, at least to a us’ but that only in one respect did
large extent. This is why these coun- they tell the truth: ‘Capitalism exactly
tries are generally advised to adopt a resembles the picture they showed us.’
process of →deregulation, which basi-
cally entails a retreat of the state from In the course of →globalisation, the
those areas where it used to have a features of the different market econo-
controlling effect on private economic mies will become assimilated, but differ-
activities. The difficulties of deregula- ences will always remain due to, for
tion are on one hand rooted in the tra- instance, mentality or tradition. National
ditions of these countries, which have governments are not, as widely believed,
always regarded standing up for one hopelessly at the mercy of the globalisa-
another as propitious – the virtue of tion process, but it challenges them to
loyalty – and on the other hand they adhere to good governance. Just as ships
are linked to the costs associated with can tackle a stiff breeze by setting their
such a change. The weaker the econo- sails skilfully, so states can adjust to glob-
my, the more acutely painful these dif- alisation by modifying their systems of
ficulties will be. governance wisely.
REFERENCES: ciples: the labour law currently in force

BARBIER, H.-D./VAUBEL, R. (1993), makes provision for free working con-
Handbuch Marktwirtschaft, 2nd edition, ditions. For the purpose of increased
Stuttgart; LUDWIG-ERHARD-STIF-
prosperity for all, it relies on the suc-
TUNG (ed) (1995), Transformation als ord-
cesses of a system of decentralised plan-
nungspolitische Herausforderung, Bonn; LUD-
WIG-ERHARD-STIFTUNG (ed) (1994),
ning. Nevertheless, labour law has to be
Grundtexte zur Sozialen Marktwirtschaft, 3 vol- seen in the context of its place within a
umes, Stuttgart, Jena, New York. constitution that grants freedom of
association as a fundamental right.
Joachim Starbatty The organisation of workers and
employers in associations is voluntary
(trade unions and employers’ associa-
Unemployment: Causes and effects tions), but their collective agreements
and union contracts affect conditions in
No one should be personally blamed for the workplace and the economic condi-
being unemployed. The problem of tions as a whole (→collective agreements).
unemployment cannot be properly The organisational element in the
understood and solved unless all the area of labour law is manifested in the
contributing factors are taken into right to form associations, the right to
account. Unemployment is the result of enter into collective agreements, the
extremely complex cause-effect rela- right to engage in →industrial action, as
tionships involving people, the institu- well as →industrial relations and the right
tional framework of the state, markets, to →co-determination. The intention is to
and society and its organisation. guarantee →social justice in a system of
Historically, the development of these markets where the supremacy of one
cause-effect relationships has led to commercial interest group is generally
prosperity levels previously inconceiv- to be avoided. The most important
able in the world. Unemployment is a argument in favour of collective worker
sign of poor organisation of the main representation through trade union is
contributing factors and processes. A the assumption that otherwise a power
solution to the problem of unemploy- imbalance between workers and
ment therefore requires an analysis of employers would develop (labour mar-
some shortcomings. ket regulations).
What characterises a free market
Job markets and occupation system is decentralised planning. This
It is true to say that in advanced indus- means that a variety of production units
trialised societies the world over, and (businesses), independently and at their
equally in Germany, a system of organ- own risk, make plans to satisfy the
ised work has developed, albeit in dif- needs of the buyer (customer) by
ferent forms, that in terms of economic means of specific product and service
efficiency far exceeds all past modes of offers. In order to be able to make these
production. offers, they have to enter into contrac-
This system of organised work is tual relationships with the requisite fac-
indeed committed to free market prin- tors of production. It is on the basis of
464 Unemployment: Causes and effects
this system of advanced division of of tasks, responsibility in dealings with

labour that businesses can offer steady materials and humans and, added to
employment. this, the social skills needed to get on
A worker, by accepting a job offer well with the other people in the work-
and more especially by actually starting place and to achieve a cooperative way
work, enters into an employment rela- of working. Such competences are
tionship based on statutes laid down in indispensable for the organisation of
the employment contract and which are economically efficient operational
legally binding for both employer and processes in →enterprises.
employee. The business itself forms the basis
The performance requirements for the salaries payable to the staff.
which an employee has to satisfy – apart These salaries are negotiated on the
from special professional qualifications labour market; their levels depend on
– include a high degree of punctuality, evaluations of both the type of work
accuracy and precision in the execution involved and the worker’s perform-
Different categories of unemployment
Entering categories Leaving category blockages
Frictional unemployment
Not gainful
employment
Friction while filling job vacancies
Demographic with suitable unemployed individuals
– Population Incoming
unemploy-
increase unemployment Unemployment due to skills profile
ment
– Training
– Silent reserve
Vacancies remain open due to

discrepancies between the skills
Unemployment profiles of the unemployed and the
vacancies
Gainful
employment
Own decision to Unemployment due to business

quit cycles
Due to cyclical underuse of the

Dismissal Seasonal Blockages to production capacities, jobs remain
unemployment leaving unem- temporarily vacant
– End of ployment caused
season by ...
Unemploy-
– Business Structural unemployment
ment due to
cycles business cycle
Unemployment due to structural
– Company
problems inherent in the system
closures,
Structural
bankruptcies unemployment Unemployed cannot find work due
– Technical to global lack of suitable/lucrative
transforma- jobs (‘job gap’)
Technological
tion, decision
unemployment
to downsize
Source: Translated from Willke 1990, p 63

ance. They are by far the largest source reached a total volume of about 4–5
of →revenues in the national economy. million. In view of these dynamics and
the fact that their actual details cannot
Competition as the catalyst for prosperi- be foreseen, it must be assumed that
ty and changes in the labour market there will always be a certain amount of
Free market economies rely on the involuntary unemployment.
dynamics of →competition for increased
prosperity. New products, procedures, On the typology of unemployment
markets and organisational structures In order to understand the causes of the
bring with them irreversibly altered emergence of unemployment, it will be
modes of production and acquisition, most helpful to refer back to this con-
leading to a changed structure of work stant movement of market processes.
for gain. At times when the respective This opens the view on to a typology of
volumes of dismissals and reinstate- unemployment. In this regard, the
ments of workers are equal – this gen- most important question is: What is
erally only happens during periods of blocking an easy transition from an
rapid growth of the national product – unemployed to an employed state, so
the awareness of the fact that extremely desirable to everyone who is involun-
sensitive and complicated market tarily unemployed? One thus asks par-
processes are at work tends to wane. In ticularly for the facts, which after a dis-
the job markets, the dynamics of these missal can delay a brisk reintegration
processes manifest themselves above all into gainful employment. The figure
in the number of people per year opting opposite illustrates the potential barri-
for a change of occupation. ers preventing access to gainful
According to the occupational sta- employment, causing certain people to
tistics of the →Federal Employment remain unemployed.
Agency, the employment circumstances On analysing this figure, the first
of nearly one-third of the work force conclusion is that there are times when
changed in 1998. That means that with- a state of nearly full employment
in a three-year period the structure of (→employment) cannot be achieved
the economy undergoes an almost because overall demand in the econo-
complete transformation. What this my is too low. This is essentially deter-
may look like in detail can be illustrated mined by consumers and investors and
with the help of data extracted from job their future expectations, and also by
market investigations during the 1970s the way private and public households
and 1980s: with a total volume of about manage their budgets, both at home
26–27 million jobs, 10–12 million new and abroad.
occupations were taking place annually. Second, however, one has to bear in
Three to four million of these consisted mind that demand can fluctuate for
of entry and exit mobility (which repre- such different reasons as seasonal or
sented 12–15% of all jobs), while about structural changes or because of busi-
2.5 million represented inter-company ness cycles.
movements (or approximately one-fifth Third, some of the typical charac-
of all job changes); in-house transfers teristics of the phenomenon of unem-
466 Unemployment: Causes and effects
Distribution of unemployment by different groups in Germany, 1995–2005
1995 2000 2005

% x 1,000 % x 1,000 % x 1,000
Total number of unemployed 100.0 3,521 100.0 3,684 100.0 3,989

Of these:
Male 50.1 1,764 51.5 1,899 52.4 2,089
Female 49.9 1,756 48.5 1,786 47.7 1,901
Foreigners n.a. n.a. 11.9 440 15.1 604
Germans n.a. n.a. 88.1 3,245 84.9 3,385
With health problems 22.7 798 26.1 963 22.1 881
Of these: severely disabled 4.9 173 4.9 179 4.1 165
Permanently unemployed
persons (>1 year) 31.9 1,125 36.4 1,343 37.4 1,492
With completed
professional education 61.0 2,147 62.2 2,290 59.7 2,382
Without completed
professional education 39.0 1,374 37.8 1,395 40.3 1,608
Elderly people (age in years)
55–59 18.2 641 17.2 635 10.6 421
60–64 2.8 100 4.3 158 1.6 63
Source: Federal Labour Agency: Structure Analysis
ployment arise from inflexibilities in (unemployed for one year and longer)
the development and structuring of as a consequence of the combination of
wages, which in turn are consequences several factors which make successful
of collective agreements. Furthermore, outcomes difficult for the agencies.
certain government decisions in the One of these is the duration of unem-
sector of fiscal, taxation and competi- ployment already existing. Brisk re-
tion policies have a negative effect on employment is therefore a priority. If
employment. Appraisals for Germany this fails due to high adjustment hur-
up to 1998 indicate that mistakes in this dles, for example wage levels being too
third area may have contributed about high and rigid due to the wage systems
8% to the unemployment rate. (a phenomenon which has been
Fourth, empirical research has grap- observed since 1997), there is a danger
pled with the additional question of the that long-term unemployment will rise
extent to which individual, i.e. personal despite an overall downward trend.
characteristics, may make it difficult for On the one hand, this proves the
job-seekers to find employment. The importance of making systematic dis-
figure illustrates the sorts of hurdles tinctions between the causes of unem-
present in the job market in Germany. ployment, since these are what deter-
Apart from the question of how mine the choice of economic policy
effective employment agencies can measures to combat them. On the
actually be, this diagram highlights the other hand, it is obvious that this dis-
problem of long-term unemployment tinction alone does not suffice: complex
Rate of unemployment by educational background in Germany, 1991–2004
cause-effect relationships that come misery as the common ideal to be

into play in each individual case must attained by all peoples and nations.
also be taken into account. If the diag- Article 22 reads: ‘Every human being as
nosis ignores the potential multiplicity a member of society has the right to
of causative factors, the treatment is social security’. Article 23 states that
doomed to failure. Unfortunately, every human being has the right to
everyday politics is all too often lacking work, to free choice of occupation, to
in sufficiently differentiated analysis. adequate and satisfactory working con-
ditions as well as to protection against
REFERENCES: unemployment; and, under the heading
BUNDESMINISTERIUM FÜR FAMI- social support, special reference is made
LIE UND SENIOREN (ed) (1994), Fünfter in Article 25 to security in the event of
Familienbericht: Familien und Familienpolitik im
unemployment.
geeinten Deutschland – Zukunft des Human-
In the context of the social, eco-
vermögens, Bonn; IWD – Informationsdienst
des Instituts der deutschen Wirtschaft
nomic and financial policies of the
(1985), Das Qualifikationsdefizit, 11(42), p. 5; German federal government, the
WILLKE, G. (1990), Arbeitslosigkeit – Employment Promotion Act (1969;
Diagnosen und Therapien, Hannover. amended several times) is meant to pro-
mote balance in the labour market, tak-
Hans-Günter Krüsselberg ing into account the social, economic
and finance policies implemented by
government.
Unemployment: Social security The most recent amendment
specifically concedes that the original
The United Nations General Declara- idea – sustained by the euphoria of
tion of Human Rights (1948) considers post-Keynesian thinking on employ-
the creation of a world free of fear and ment (→Keynesianism) – that govern-
468 Unemployment: Social security
ment can guarantee full employment if they: are temporarily not in an

(→employment), and at the same time employment relationship, or are look-
also stimulate economic growth, repre- ing for a job, making them liable for
sents an over-estimation of the actual social security contributions; are open
possibilities of economic policy. For to the attempts by the labour office to
these reasons, particular emphasis is to find an acceptable position; and are reg-
be put on the supportive role of work istered as unemployed at a labour
promotion in the future; it is supposed office. In this case, those concerned
to facilitate access to the regular job (provided they meet certain criteria)
market and to be more strongly focused become eligible for unemployment
on actively helpful job centres. benefit, graduated over time and
Work promotion entails measures depending both on their age and on the
for the prevention of unemployment as length of time spent in an occupation
well as assistance in cases of unemploy- with compulsory insurance contribu-
ment that already exist. The latter tions.
should achieve the integration or re- Younger employees can become eli-
integration of the unemployed person gible for unemployment benefits for a
into working life as quickly as possible. maximum of one year. Unemployment
The legislation still accords priority to relief is granted when a person is no
avoiding unemployment, for example longer eligible for unemployment pay,
via job procurement by training, to if special conditions are met during a
security in the event of unemployment previous employment relationship that
by means of the payment of wage present grounds for such claims, and if
replacement grants (such as unemploy- hardship in the sense of destitution
ment benefits, unemployment aid) to exists. In principle, unemployment
potential wage-earners in times of relief is granted for an unlimited period,
involuntary unemployment. but only until reaching retirement age.
And yet the legitimate need to allo- Within the framework of the social
cate money to persons who due to security system, public social security
unemployment are unable to support assistance is supposed to close the gaps
themselves adequately, has to be justi- left by other social security benefit
fied. Here, the legislator takes the fol- schemes. Its task is to enable the bene-
lowing stance: the dynamism of a com- ficiaries to live with dignity and enjoy
petitive economy generally boosts eco- the minimum socio-cultural standard
nomic and social prosperity. If, howev- of living that can be expected in
er, this dynamism leads to involuntary Germany.
unemployment for certain individuals, The social security assistance forms
society owes them wage replacement a universal safety net for people who are
and assistance in the search for a new in financial trouble, meaning that they
job of equal or ideally higher value. are not able to support themselves by
their own efforts, and to which all
The labour promotion laws and the need needy citizens are legally entitled.
for reform Government assistance is supposed to
In legal terms, workers are unemployed offer all welfare beneficiaries the oppor-
tunity to reintegrate themselves into the benefits that support job-seekers in

general working life of the community. their search for gainful employment,
Citizens are expected to participate in while at the same time obviating cases
this effort to the best of their ability. of social hardship.
Compared to 1980 when only about The manner in which the various
10% of the then scarcely 1.3 million responsibilities are assigned is clearly of
people on the social assistance roll were great importance. One must never for-
unemployed, their proportion rose to get that for a long time the self-help
40% in 1998, with 2.9 million people on organisations which sprang up in the
social assistance. The considerable course of industrialisation in the form
extent of long-term unemployment of trade associations and trade unions
must be regarded as one of the main were regarded as the most suitable
reasons for the almost explosive expan- providers of unemployment insurance,
sion of the volume of social assistance particularly if the public sector is in a
grants in Germany. The fact that all cit- position to provide some of the finance.
izens are entitled to support grants Indeed, this approach has been revisited
equivalent to the social assistance as one of the reform proposals. At the
requirements, means that in all cases same time, special attention should be
where the unemployment assistance or paid to proposals that plan to allocate
unemployment pay does not reach this the responsibility for active employ-
level the difference has to be made up ment policy to the municipalities, while
by social assistance. Actual case studies wanting assurances that they can attract
for the year 1997 singled out that above sufficient funds from the vertical finan-
all, unemployed heads of families with cial equalisation scheme (→fiscal federal-
low skill received, thanks to the com- ism). Without reforms, which need to
plementary social assistance, amounts be properly conceptualised and must be
which added up to no less than 93% of tried and tested, it will hardly be possi-
their earlier disposable labour income. ble to solve the current labour dilem-
The political conclusion to be ma, but reforms are nevertheless neces-
drawn from this is that the German sary.
social security assistance system is now
torn between its role as a provider of Unemployment – the individual and the
social benefits and the question of how family perspective
to motivate unemployed people to find The effect of unemployment on the sit-
new jobs or to improve their profes- uation of individuals and families is dis-
sional qualifications. At both the theo- cussed in detail in the Fifth Family Report
retical and practical levels, the concept (1994). There, the serious conse-
of a politically created ‘dependency quences of unemployment for both
trap’ is frequently talked about. single people and families are highlight-
Reforms have been suggested that carry ed, while at the same time it is made
a financial reward for the unemployed clear that the actual state of information
who make the effort to find work. Each on individual experiences is extremely
of these reform proposals is essentially unsatisfactory. The long-term effects of
focused on a workable combination of unemployment include:
470 Unemployment: Social security
• inclination to social isolation and dis- to gainful employment would under

integration; such circumstances no longer be expe-
rienced as disastrous events that are
• potential identity crisis leading to the inevitably afflicted with the stigma of
risk of suicide; material and psychological poverty.
Should this assumption be correct, the
• loss of work orientation and motiva- ‘de-dramatisation’ intended by the leg-
tion; islator might, at least in the case of tran-
sitional unemployment, mean that cer-
• loss of the awareness of time; and tain individuals can actually accept their
unemployed state. A basic prerequisite
• the incidence of psychosomatic ill- for the implementation of such social
nesses. stabilisation processes would be eco-
nomic, financial and labour market
Yet it is equally important to consid- policies of visible reliability.
er case histories in the context of a fam- Regardless of anything else, the way
ily situation, taking into account the out of unemployment requires individ-
shared coping potential and stabilising uals to have resources at their disposal
force that the family may offer in times and to possess the drive for action that
of crisis. However, families are also at makes the adequate participation in all
risk of being confronted with the threat social processes possible, and is today
of educational difficulties affecting the rightly referred to as human capital.
children, a growing number of children This capability, coupled with the
with special needs and suffering from opportunity to access the active use of
neglect, or showing no interest in fur- other variants of capital, attainable
ther education or training out of indif- above all through the (promotion of)
ference towards their own future. wealth accumulation for workers, must
Specialist literature constantly be more strongly and imaginatively
stresses that unemployment is an supported than ever before and with
entirely historical phenomenon – par- the use of all conceivable means.
ticularly due to the coping mechanisms
available to affected individuals within REFERENCES:
their social peer groups. But simplistic KLÖS, H.-P. (1998), Arbeit plus Transfers,
conclusions are not acceptable. The Cologne; KRÜSSELBERG, H.-G. (1981),
Soziale Sicherung bei Arbeitslosigkeit, in:
way a person deals with unemployment
Handwörterbuch der Wirtschaftswissenschaft
strongly depends on that person’s atti-
(HdWW), 6, Stuttgart, pp. 603-611;
tude towards social security services MUTZ, G. (1993), Biographische Normali-
and the way these are utilised, as well as sierung diskontinuierlicher Erwerbsverläufe,
on fundamental notions about the value Munich.
systems of the world of work. Empirical
research developed the thesis that gain- Hans Günter Krüsselberg
fully employed people in Germany had
learned to integrate employment inter-
ruptions into their lives. Interruptions
Vocational training and further place on the shop floor (operational

education training) and has to be funded by the
individual companies, company com-
In contrast to general education mitment to appropriate, quality training
(schools for general education), voca- is very strong. It is clearly stronger than
tional education is aimed at either the that of a public school or university
acquisition of special knowledge and would be, where it makes no difference
skills pertaining to a particular occupa- whether the training of pupils and stu-
tion (training), or at gaining additional dents is successful or not.
qualifications (further training). Vocational training is conditional
As opposed to other countries such upon a training contract, which has to
as the United Kingdom, vocational be signed by the trainee and the compa-
training in Germany is comprehensive ny. The problem is that such contracts
and designed as a vocational unit and are signed on a voluntary basis, and a
not module-based or exclusively company or a national administration
focused on a certain subject. It takes the will sign only if they need trainees and
form of a dual training course with its suitable candidates are available. Often,
practical part on the shop floor and the the vocational ideas of the trainees and
theoretical part at a vocational college, the training requirements of the econo-
usually lasting 2.5 to 3.5 years. my do not coincide. Companies also
The definition of a profession tend to delay training if long-term busi-
(career profile) is contained in profes- ness prospects are not good. It must
sional training directives, which on the also be remembered that some years
basis of the Occupational Training Law have a high and others a low birth rate
(a federal law, unlike the school laws and that, accordingly, there will either
which are state laws) are formulated by be excess demand or a demand deficit
the parties to a collective agreement, (surplus supply) of training vacancies.
with expert advice, before being This is why not everybody who is look-
declared legally valid by the state. The ing for a training vacancy may find one
job requirements of the employers flow or, alternatively, why not all training
directly into this in such a way that they vacancies are taken up. The latter may
have general validity and do not only even occur if a number of those looking
apply to individual businesses, but are for a training vacancy are unsuccessful
officially recognised as requirements in and become unemployed, because they
the labour market. Some 365 occupa- have not been able to fulfil the require-
tions have been defined in this way. ments or because the training vacancies
The German training system – which they were looking for (regional
unlike the German schools and univer- or vocational) were not compatible
sities – enjoys a good reputation abroad. with those that were available.
The main reason for this is the keen In order to avoid the situation
interest of the training companies and where young people cannot find a
→enterprises to produce the best quali- training vacancy and in order to offer a
fied new staff members possible: since greater variety of such places, the idea
the largest part of the training takes of financing them by contributions has
472 Vocational training and further education
been repeatedly considered. Such a market economy the government can give
contribution is supposed to be levied on educational grants (training subsidies)
all companies employing trained work- and tax concessions.
ers. Such fees should be deposited into In contrast to company training, pro-
a fund, from which training places are fessional further education is not legally
eventually financed. regulated. However, in the age of the
Most of these suggestions come knowledge society and lifelong learning
from the employees and are made with it plays an ever more important role
the proviso that the companies actually (→education and research policy). Here, the
doing the training are exempt from the individuals will have to accept more
levy – to the extent of their actual train- responsibility for their qualifications in
ing expenses. But this presupposes the order to be professionally flexible and to
calculation of the costs of such training reduce the risk of →unemployment. This
posts, so that they can be deducted from means that more transparency and more
the contribution paid. This causes consultation with competent executives
administrative expenses and results in and experts will be needed. This is
the management of the fund imposing intended as a contractual requirement in
stringent cost registration regulations some employment agreements and
and additional training regulations on more recently, in isolated cases, even in
the companies. This restricts the compa- →collective agreements.
nies’ scope of action and removes more It also presupposes that individuals
and more responsibility from them. The should be prepared to use the study
system that keeps training in tune with leave to which they are entitled in some
the requirements of the labour market states of Germany for further training,
will be undermined. These are some of and if necessary sacrifice spare time as
the reasons why the employers’ side has well as contribute to the training costs.
so far not agreed to this option. The latter is required if the vocational
The efficiency of the German dual further training is to be useful to the
system of professional training is actu- individual but not to the present
ally based on the principle of individual employer. Besides that, in the context
funding by companies (→education of active →labour market policy, the
funding). It gives companies the incen- →Federal Employment Agency assists
tive to assess training requirements workers to gain further training, re-
carefully and to offer quality training. training and training on the job, in
The best way of overcoming the order to prevent their becoming unem-
drawbacks of vocational training fund- ployed from the start. Distance learn-
ed by individual companies is to achieve ing, the internet and the employment
a balance between the →supply and of new technologies open up further
demand of training posts. This can be cost-effective vocational further train-
done by means of either reducing costs ing options.
(adjustment of trainee remuneration),
or increasing trainee productivity to REFERENCES:
compensate for company expenditure BUNDESMINISTERIUM FÜR BIL-

on training. In addition, in a →social DUNG UND FORSCHUNG, Berufsbild-
ungsbericht (annual) as well as Berichtsystem by channelling capital into the produc-

Weiterbildung VII (appears bi-annually); tion of goods and services which consti-
LITH, U. v. (1992), Wirkungen der Ein- tute, safeguard and increase the pros-
führung einer Umlagefinanzierung der beruflichen
perity of the entire population by tech-
Bildung auf Landesebene am Beispiel Berlin, 1,
nical progress.
Institut für Wirtschaftspolitik, Zittau.
Under competitive conditions, a
Ulrich van Lith →market economy is usually social of its
own accord. Thus the social market
economy is not given the attribute
social only because it is complemented
Wealth accumulation policy by a comprehensive social security sys-
tem (such as →old age pension, →health
Freedom, →individual responsibility and insurance or the →basic social security sys-
social obligation are basic pillars of soci- tem), income redistribution (progres-
ety and economy in the →social market sive income tax) and public goods
economy. Private →property of net assets (schools, the judiciary), but because in
is one of the expressions of these basic the context of a workable competitive
principles. Those who own capital have market the selfish motives of individual
more scope to be free agents than those people (the profit and income motive)
who have none. The accumulation of turn into behaviour with social (pros-
assets for the purpose of making provi- perity promoting) consequences. The
sions privately (such as in the form of government through its competition
insurance, privately owned residential policy has to provide an appropriate
property, bonds) is a practical expres- basic framework.
sion of personal responsibility and This explains why in a social market
social duty (in order not to be a burden economy the government uses various
on the community). methods of assisting its citizens in accu-
Private ownership of capital as a fac- mulating capital and aims at a broad dis-
tor of production is subject to the same tribution of private wealth. This ranges
basic principles. Although the social from the promotion of savings through
obligation that private capital often building societies and securities to
includes is frequently overlooked, a worker participation in companies, and
market economy based on competitive the provision for risk and old age
principles will largely take care of it. through life assurance policies. If,
People who make capital available to despite offers of support, large sectors
the production process under these of the population are not doing enough,
conditions – by managing a private or cannot do enough, to build up capi-
business, by buying shares or, indirect- tal assets (such as in the provision for
ly, through a savings account (and the old age, in the health insurance protec-
granting of credit by the banks) – are tion, but also in the formation of their
usually motivated by profit or interest. personal human capital), legal force is
In a situation where there is healthy used (mandatory social security sys-
→competition, they are unconsciously tems, compulsory schooling).
fulfilling an important social function A variety of effects result from capi-
474 World trade order
tal formation. Through savings, new Vermögensbildung unter neuen Rahmen-

wealth is created, and financial capital is bedingungen, Cologne; — (2003), Private
usually invested in material capital Lebensökonomie und staatlicher Einfluß. Neue
Strategien zur Vermögensbildung, Cologne; —
(investments). More capital increases
(2003), Private Altersvorsorge am Beispiel der
the productivity of the economy and
‘Riester Rente’. Darstellung und Würdiging aus
thus the real income of households. gesamtwirtschaftlicher Sicht, Cologne; LAM-
Broader distribution of capital – insofar PERT, H. (2000), Vermögenspolitik aus der
as it succeeds – is an independent goal, Sicht wirtschaftlicher Entwicklung, in:
but it also levels out income distribu- Lüdeke, Reinar (ed), Wirtschaftswissenschaften
tion. However, capital distribution im Dienste der Verteilungs-, Geld- und
(most easily perhaps through a greater Finanzpolitik, Berlin, pp. 83-99; WESTER-
spread of residential property) and HEIDE, P. (1999), Vermögenspolitik in der
income distribution are difficult to Sozialen Marktwirtschaft, Ziele und
manipulate through politics. Wirkungsmöglichkeiten, Münster.
Making provision for the future
Eckhard Knappe
means reducing financial uncertainty.
However, the different forms (private
assets, private insurance, social security,
also one’s own training and children) World trade order
have different pros and cons. Thus while
social security reduces individual uncer- The world trade order covers all the
tainty, it generally does not form capital – commercial rules and institutions for
as it is pay-as-you-go based – and it thus the promotion of the international
contributes little to the accumulation of exchange of material goods, based on
assets and to economic growth. Future intergovernmental agreements and
risks can be reduced through diversifica- services, for the benefit of all countries
tion: the greatest possible variety of dif- involved. Whether and how this can be
ferent forms (contribution-funded achieved depends on the global net-
social security, insurance policies based work of the economic systems. This
on capital, financial assets such as bank network and how it functions has a sig-
deposits, and material assets such as res- nificant impact on the production and
idential property) is therefore an advan- employment situation in the different
tage. Since pay-as-you-go based social sectors (the export sectors and indus-
security (e.g. pension, health and nurs- tries exposed to competitive imports),
ing care insurance schemes) is at risk due on income levels and on growth trends
to →demographic development, a political in the trading partners worldwide.
attempt is now under way to supplement International trade rules that form
this through the promotion of private the basic regulatory framework for the
savings schemes (i.e. private savings for free global exchange of goods and for
old age) and various capital accumulat- international →competition, intensify
ing systems. international competition and cause the
REFERENCES:
global goods markets to become more
DEUTSCHES INSTITUT FÜR AL- closely interdependent. The opening-
TERSVORSORGE – DIA (ed) (2000), up of national markets and internation-
al trade regulations are important Growing exports create additional,

aspects of the ongoing process of glob- relatively highly paid jobs and higher
alisation. returns for business. More imports
This is also the case regarding the generate more indirect real income
increasing internationalisation of pro- thanks to cost savings and lower prices,
duction processes (where the manufac- when local products that are relatively
ture of components and the final expensive to manufacture at home are
assembly of a product take place in dif- replaced by imported goods which cost
ferent countries), greater international significantly less. These static efficiency
mobility of the factor of production gains due to free trade are reinforced by
capital (globalisation of the capital mar- greater dynamic efficiency, since in an
kets: increase of foreign direct invest- open world economy not only the price
ments worldwide) and more integrated competition is enforced by even the
international financial markets (globali- competition for innovation. New tech-
sation of the financial markets: expan- nical knowledge resulting from this is
sion above average) (→globalisation). circulated around the globe faster and
The political task of incorporating more economically, lowering costs and
world trade rules into internationally prices and improving consumer supply.
binding treaties has to be accomplished In this way, globalisation offers both
by finding a compromise between the developed industrialised countries and
conflicting issues of the global interest advancing developing countries the
in free trade and the national desire to potential of greater prosperity. At the
shield economic sectors at home from same time, permanent changes to
international competition – on the industrial, employment and income
grounds that the different industries, distribution procedures are inevitable.
under increasing pressure from This adjustment process will produce
imports, see this as a threat to jobs and winners and losers. But the promise of
profit positions. market globalisation lies in the very fact
The conflict between free trade and that the overall prosperity gain offered
the protectionism of national foreign by world trade liberalisation is greater
trade policies is reflected in the current than the sum of individual prosperity
debate on the risks and opportunities of losses. For this reason, compensation
a global goods market. for those who have lost out is definitely
For all the countries involved, mar- affordable and makes it easier to cope
ket globalisation, which is driven by the with adjustments to the changed
free trade system, is leading to higher employment and distribution structure.
productivity, rising wages and rising real This could serve as the groundwork for
income. The sources of this prosperity forward-looking solutions (the plan-
increase have become accessible ning and development of job qualifica-
through multilateral trade liberalisa- tions with a future, more flexible job
tion, since, in countries that have market) aimed at enabling as many peo-
opened their markets to one another, ple as possible to reap the benefits of
exports and imports are growing simul- globalisation.
taneously. A great deal of statistical and experi-
476 World trade order
ential material points to a positive rela- tries are permitted to restrict interna-
tionship in both industrialised and tional competition. The most impor-
developing countries between trade lib- tant commercial restrictions legalised in
eralisation and globalisation on the one GATT: 1947 and the WTO agreement
hand, and increased prosperity and are anti-dumping compensation duties
poverty reduction on the other. This (Article 6, GATT) and interventions for
provides empirical evidence in support the protection of the balance of pay-
of the assumption that the opportuni- ments (Article 12, GATT); these are
ties of globalisation are greater than the also covered by an authorisation to
disadvantages, and that the risks are implement specific protective measures
controllable. in the event of an unexpected and fast
The current international trade sys- increase of certain imported goods
tem is based on the agreement on the (Article 19, GATT). The resistance to
new world trade order (World Trade reform of these ‘door openers’ for pro-
Organization – WTO – agreement) tectionist commercial policies shows
which came into force on 1 January that even the WTO agreement was a
1995, officially replacing the General negotiated outcome which was sup-
Agreement on Tariffs and Trade posed to find a lasting and acceptable
(GATT: 1947) (→international organisa- compromise between those in support
tions). After that, the WTO was estab- of unrestricted global trade and those in
lished in Geneva on the legal basis of support of national protectionism.
the revised GATT (1994), the new serv- Thus the WTO trade rules remain
ices agreement (General Agreement on ambivalent because the ongoing liberal-
Trade in Services: GATS) and the isation that would lead to a world mar-
TRIPS agreement (Trade-Related ket economy may be either promoted
Aspects of Intellectual Property Rights) or hampered. Considerable untapped
GATT: 1994 contains the codifica- liberalisation potential is to be found
tion of the free trade regulations for particularly in the agricultural and serv-
international goods trade (industrial ices trades – perhaps important future
and agricultural goods), whereas the areas for WTO reform policy.
purpose of GATS is the liberalisation of
the international services trade. All the REFERENCES:
commercial sectors regulated under the BENDER, D. (2000), Anforderungen an

umbrella of the WTO have access to eine wohlstands- und entwicklungs-
fördernde Weltwirtschaftsordnung im
mediation procedures. A WTO mem-
Zeitalter der Globalisierung, in: Jochimsen,
ber country that lodges a complaint
R. (ed), Globaler Wettbewerb und welt-
against another contracting party for the wirtschaftliche Ordnungspolitik, Bonn, pp.156-
breach of WTO regulations can force 181; FRENKEL, M./ BENDER, D. (eds)
the other party to abandon the offend- (1996), GATT und neue Welthandelsordnung,
ing commercial policy measure. Wiesbaden; SENTI, R. (2000), WTO-
The liberalisation obligations of the System und Funktionsweise der Welthandels-
WTO agreement are limited by protec- ordnung, Zurich.
tive clauses. These regulate exceptional
conditions under which member coun- Dieter Bender
477
Glossary
Agenda 2000
Agenda 2000 was adopted in 1999 during the European Council convention in
Berlin. The idea was to realise several goals at the same time: reform of the agri-
cultural policy and the →structural policy; determination of the European Union’s
(EU’s) financial framework for the period 2000–2006; and limitation and alloca-
tion of funding for the first phase of the Eastern expansion. Thus the EU wanted
to achieve internal reforms, the financial soundness of its existing members and
expenditure limitations for the Eastern expansion with just one session. Although
these ambitious aims were only partly realised, Agenda 2000 still functions as a
ceiling for expenditure.
Agglomeration
Agglomeration describes the tendency of →enterprises to settle in a certain place in
increased numbers, in order to benefit from cost and other advantages (such as
industrial parks). The agglomeration of several commercial enterprises can make
a specific region more attractive for consumers (for example, shopping malls), and
the same holds for cultural facilities.
Allocation
Allocation refers to the utilisation and distribution of goods and factors of pro-
duction in a national economy among the different industries (What is produced,
how and in what quantities?) and on the different production locations (Where is
the production taking place?). In a →market economy, prices primarily ensure that
goods and factors of production are optimally distributed in the markets (alloca-
tion function of prices).
Annuity
Loans are usually associated with annual interest payments so that the borrowed
amount is repaid after an agreed period of time. The annually payable amount
consists of the interest payment and the agreed repayment; the combination of
these two partial payments is called annuity.
Arbitrage
Arbitrage is a term used in economics to explain the behaviour of the economic
agents both in ordinary situations and in special markets. Someone who takes a
shopping trolley to the cash till and estimates which queue has the fastest service
is practising arbitrage; the aim is to save time. Someone monitoring the stock
478 Glossary
exchange or the foreign exchange markets and finds that price differences have
arisen for identical shares or foreign exchange will buy or sell shares or foreign
exchange in order to make a profit out of the price difference. At the same time,
this behaviour means that queues are equalised and market prices are equalised.
This equalising effect of arbitrage has great significance for the →distribution and
functioning of the →market mechanism.
Bancassurance concept
A financial market able to offer all the financial options through one supplier
(loans, securities, bonds, insurance policies) is referred to as an all-finance market.
Typical suppliers of all-finance do not exist. This means, for example, that non-
banks (such as insurance companies) can supply financial products.
Basel II
Short for the Basel Agreement, adopted by the Basel Committee on Banking
Supervision. The purpose of the agreement is the stabilisation of the national and
international banking systems and the avoidance of competition distortions
through the harmonisation of banking regulations worldwide. The first equity
agreement (Basel I) came into force in 1992. Since the implementation of its reg-
ulations, banking services and the structure of the banking sector have changed
considerably. The existing equity regulations had ceased to be an accurate reflec-
tion of the risk profile of the financial institutions. This is why in 1998 the Basel
Committee embarked on the development of new standards. These came into
force at the end of 2006. The new Basel equity agreement (Basel II) rests on three
pillars: equity requirements; monitoring procedures instituted in compliance with
banking supervisory regulations; and extended disclosure. Basel II has adhered to
the current definition of equity as well as a minimum equity quota of 8%. Besides
the market and credit risk, the operational risk is now also taken into account. The
creditworthiness of the borrower has become more relevant in terms of risk calcu-
lation: instead of the undifferentiated allocation of risk weighting ratios, the cre-
ditworthiness of each debtor is judged by means of external ratings or estimations
carried out internally by the bank. The second pillar regulates the monitoring pro-
cedures of the national supervisory authorities and strengthens their qualitative ori-
entation. The third pillar extends the disclosure requirements for banks in order to
make financial institutions more disciplined.
Benchmark
In the context of accessing the progress of an enterprise, a reference unit is cho-
sen for the area to be analysed (internally or externally), by means of which a con-
tinual and ongoing results comparison is carried out. The best results are referred
to as benchmarks and are considered as indicators. The profit centre of one’s own
enterprise can be a benchmark and so also can competitors serve as benchmark
references. A benchmark can be an operational indicator (such as turnover, costs
and market share), while in the economy the term has a very broad field of appli-
Glossary 479
cation. This means that the interest rate of the federal borrowing, which is cre-
dited with undoubted creditworthiness, is the benchmark for securities with a
fixed interest rate in the capital market.
Bizone
After the Second World War, Germany was divided into three Western zones and
an Eastern zone. In West Germany, on 1 January 1947, the Bizone was established
in order to reorganise the economic administration of the parts of Germany under
American and British occupation. As an interim solution, German administrative
bodies were created in order to deal with the problems of economic supplies. The
regional state parliaments named candidates for an economic affairs committee,
regional representatives formed an executive committee and a directorate was
selected. In April 1949, the Bizone was expanded by the area under French occu-
pation and it became the Trizone. Associated with that was the establishment of
the ‘Allied High Commission’ as the highest organ of control of the fledgling
future Federal Republic of Germany.
Blue List institutes

The federal government and the states support several economic research institu-
tions, which are entered into the so-called Blue List. They are examined at regu-
lar intervals in order to establish whether their performance levels warrant further
support. The Blue List currently comprises the following research institutions:
• Institut für Weltwirtschaft (Institute for the World Economy), Kiel

• Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Essen (RWI)
• Hamburgisches Welt-Wirtschafts-Archiv (Hamburg Institute of International
Economics), Hamburg (HWWA)
• Institut für Wirtschaftsforschung (Institute for Economic Research), Munich (Ifo)
• Institut für Wirtschaftsforschung (Institute for Economic Research), Halle
• Deutsches Institut für Wirtschaftsforschung (German Institute for Economic
Research), Berlin (DIW)
Bracero Programme
The Bracero Programme was a formal bilateral agreement between the United
States and Mexico which existed from 1942 to 1964. It enabled between four and
five million Mexicans to work as guest workers in the US – even if only in less-
qualified or seasonal jobs, such as on Californian commercial farms. As with sim-
ilar programmes in Europe, the Bracero Programme failed because the guests
stayed; and nothing proved to be more permanent than the immigration that had
been planned as temporary.
Brain drain
‘Brain drain’ is the term for the emigration of more highly qualified workers.
Brain drains can become a problem when experts or specially trained workers
480 Glossary
emigrate and human capital dries up in certain locations. When this happens, less
qualified people who want to stay may also lose their jobs because the competitive
edge has been lost, or because specific services are no longer on offer. If, for exam-
ple, medical practitioners leave their place of work, this may result in a hospital
having to cease its service. On the other hand, the brain drain may also mean that
the incentive is created to acquire more human capital, which leads to a higher
level of education. Also, the remittances of the emigrants and the possibility that
they may return home later have to be taken into account.
Casuistic
This describes a method of reasoning and conducting research, proceeding case
by case or considering all possibilities.
Compulsory disclosure
Information for the public about the development of an enterprise. According to
German law, the corporate form of the limited company is obliged to publish its
annual accounts as well as a situation report and to make this accessible to its
investors (shareholders). This compulsory disclosure ensures the transparency of
the development of a corporation for the actual and potential owners of an enter-
prise, and makes interventions into the development of an enterprise possible –
such as through the sale or acquisition of shares on the stock exchange, or the
election or dismissal of members of the board of directors at a general meeting of
shareholders.
Conformity to institutional order

In accordance with the rules and regulations of an institutional order respective-
ly, a behaviour according to these rules. The term also means economic policy
(actions and instruments) whose implementation does not disturb the effective-
ness of the institutional order (for example, of a market economy).
Convergence, converge
This signifies the advancement to the point where conformity of opinions or aims
is reached, or describes a procedure for the purpose of achieving such conformity.
Convertibility
Convertibility describes the right to exchange or to convert national currency into
foreign currency. When this is intended for the payment of imports or exports of
goods and services, it is referred to as the system of payments or the freedom of
payments. If it concerns the import or export of funds (capital), it is referred to as
capital transactions. In the EU Treaty, the absolute freedom of payments and of
capital transactions applies (article 56) between the member states and in relation
to other states (erga omnes). The charter of the International Monetary Fund mere-
ly contains a convertibility guarantee for the transactions of the current account,
which roughly correspond to the freedom of payments (article VIII).
Glossary 481
Currency snake
The European currency snake existed from 1972 until 1979. It arose when a num-
ber of European governments agreed that the level of oscillation of their currencies
among each other was to be smaller than that against the dollar. This is how, in
April 1972, the snake in the (dollar) tunnel began. When in March 1973 the
European currencies introduced flexible exchange rates against the dollar
(floating), the tunnel fell away. The European currency snake existed until March
1979, with the currencies concerned defending narrow exchange rate ranges of ±
2.25%.
Deflation
The usual explanation of deflation is that prices fall to such an extent that price
levels are also negatively affected. Often even a persistent (moderate) lowering of
price levels is associated with deflationary tendencies – due to falling economic
activity or following a marked decrease of economic →growth. Side effects, just as
in the case of inflation, are imbalances between the goods and the monetary cir-
culation in a national economy.
Degree of openness
The degree of openness of an economy describes the extent to which it is inte-
grated in foreign trade and capital transactions. The degree of openness can be cal-
culated as the proportion between exports and gross domestic product.
Demand management
The economic policy concept of demand management originates from
→Keynesianism. Its objective is to influence macroeconomic aggregates such as
investments, consumption, savings, supply and demand with monetary and fiscal
policy measures, in such a way that economic fluctuations are stabilised, price lev-
els fall or rise, →employment increases and the economy grows. Representatives of
demand management believe in the feasibility of shaping the economy and in the
fact that →business cycles can be mastered (→constructivism).
Disparity
Derived from the Latin word for inequality, difference.
Distribution
In economic terms, it refers to the distribution of →income and assets. In business
administration terms, distribution includes all activities and sales channels which
serve the distribution of products among consumers.
Dollarisation see Euroisation
Economic agents
These are individuals and organisations that regularly participate in the economic
482 Glossary
process, such as private households, enterprises, the state and its institutions, and
foreign countries.
Economic rent
Economic rent is a passive income (effect) that a person receives without having
produced a personal achievement in return. Economic theory makes a distinction
between consumer and producer rents. Consumers in the market take home con-
sumer rents when they are prepared to pay a higher price (p) for a certain good (x)
as the price that has resulted as market equilibrium. By contrast, producers takes
home a producer rent when they can offer the good (x) at a lower price (p)
because their costs are lower than the actual price in market equilibrium.
Economic style
The concept of style has been borrowed from art, where different styles can be
distinguished. In economics, the term describes (changing) attitudes and habits
towards the economy, including ways of organisation and techniques of manage-
ment of the economy, and subsequently of politics and society. Examples would
include mercantilism, socialism and different types of capitalism. Thus the ‘eco-
nomic style’ is an expression of the integration of economy into the cultural cli-
mate of a particular era or period. Pioneering researchers into economic styles are
Max Weber, Werner Sombart, Artur Spietoff and Alfred →Müller-Armack. The
concept of economic style is currently experiencing a revival as a basic category of
research into economic culture.
EEC/EC/EU
This terminology is characterised by many uncertainties. The EEC – the
European Economic Community – was established in 1958 as a customs union
with more far-reaching, including political, objectives. At the same time, the
European Atomic Energy Community (Euratom) was established while the
European Community for Coal and Steel (ECCS) had already been founded in
1952. In the merger treaty of 8 April 1965 the decision was taken to merge the
organs of the three parts (the EEC, Euratom and the ECCS) by 1 July 1967. The
result was the EC – the European Community. With the European Union Treaty
of 7 February 1992 in Maastricht, the European Union (EU) was created, which
came into force on 1 November 1993. The EU took over from the EC. At the end
of 2003, Euratom and the ECCS were dissolved as independent bodies, leaving
only the EU.
Egalitarianism
The social theory of egalitarianism is in favour of, and strives for, the realisation
of the highest possible degree of equality of the members of a society.
Empirical evidence
This exists when a particular statement is confirmed by data or experiences from
Glossary 483
the past. Statistical methods are often used in order to determine the accuracy or
reliability of the data.
Empirical method
This refers to experiential knowledge based on data and other information. It pre-
supposes investigations and includes the testing of assumptions (hypotheses)
against real economic data.
Endogenous
This refers to developments resulting from the system itself. They are thus inher-
ent in the system and without any external influences. The opposite of endoge-
nous is exogenous.
ERP special assets

The European Recovery Programme (ERP) is a special asset of the Federal
Republic of Germany. It was established in 1953 and it particularly combines the
means of what used to be Marshall Plan assistance for reconstruction after the
Second World War. ERP funds are available as long-term loans at favourable inter-
est rates for the promotion of special economic regions and sectors (such as envi-
ronmental protection) and of the middle classes. ERP funds were available in 1990
for the modernisation of the German Democratic Republic. ERP special assets
have a revolving character since the loan repayments go to the special assets.
Euroisation/dollarisation
Euroisation/dollarisation entails the complete replacement of the national curren-
cy in its functions due to the behaviour of the economic agents or as the result of
a political decision. If this happens, a foreign currency in the form of cash usual-
ly becomes legal tender as well as a unit of calculation and a medium of capital
storage. The main causes of such a national currency exchange (currency substi-
tution) are inflation and political uncertainties. It has been estimated that about
70% of US dollars in cash are in circulation outside the US, whereas in the case
of the Deutsche Mark, this may have been 30–40%. The term euroisation is also
used when a country, on joining the EU, adopts the euro as legal tender prior to
its official entry into the European Monetary Union.
European Free Trade Area (EFTA)

The European Free Trade Area was founded in 1960 on the initiative of the
United Kingdom. Its aim was both to counterbalance the European Economic
Community (EEC) and to represent an alternative for countries that were not able
to, or did not want to, join the European Union. The founder members were
Denmark, the UK, Norway, Austria, Portugal, Sweden and Switzerland. Iceland
(1970) and Finland (1985) joined later on. EFTA lost its most important members
when these members joined the European Economic Community (EEC)/
European Community (EC): 1973 Denmark and the UK; 1986 Portugal; 1995
484 Glossary
Finland, Austria and Sweden. While the free trade area likewise removed internal
customs duties and trade barriers, it differed from the customs union of the EEC
in that it did not adopt a unified foreign trade regime towards third countries.
Furthermore, EFTA dispensed with →integration and a common →agricultural pol-
icy.
European Monetary System (EMS)

The European Monetary System (EMS) came into force in March 1979. Its pre-
cursor was the European Monetary Federation (from April 1972 onwards). The
EMS was a special system of fixed exchange rates with a margin of fluctuations of
2.25% concurrently with the newly created currency basket of the European
Currency Unit (ECU). After the currency crises of September 1992 and August
1993, the margin was extended to 15%. As a consequence of the European
Currency Union and the adoption of the euro as the common currency by 1
January 1999, the original EMS 1 was transformed into EMS 2, and the principle
of fixed exchange rates with a margin of fluctuations around a central rate relating
to the euro was maintained.
Evolution, evolutionary
These words describe a gradually progressive development over time. To a certain
extent, the evolutionary nature of the change makes the development predictable.
External effects, external costs

Economists refer to external effects when economic actors either do not have to
cover all the costs they are causing (negative external effects – external costs) or
when they are unable to reserve the advantages they have caused for themselves
(positive external effects – external advantages). Negative external effects are the
costs to the environment which are incurred when rivers and the environment are
polluted without enterprises taking these effects into their cost calculations.
Environmental policy has the task of preventing this kind of market failure or cor-
recting it retrospectively (→environmental policy: instruments). Market failure also
exists when there are positive external effects. When inventors do not receive pro-
tection by patent (meaning that anyone can benefit from their inventions), the
inventors do not receive a fair reward for their achievements. This curbs the
search for new technological and economic solutions.
Facility (credit)
Provision of credit, usually between central banks, for foreign exchange market
interventions (→currency system and exchange rate regimes).
Factors of production
In economic theory, a distinction is made between three different factors of pro-
duction: land, labour and capital. Their significance is the fact that through them,
a surplus can be achieved in the process of production.
Glossary 485
Free trade
This refers to the world trade system in its ideal state where there are no barriers
to trade through customs duties, non-tariff-related impediments (e.g. discrimina-
tory administrative regulations against foreign products) or quantitative restric-
tions. Additionally, at least a free transfer system has to be guaranteed, and ideally
transactions free of capital as well. The →world trade order of GATT/WTO is based
on a pragmatic objective: international trade liberalisation through the disman-
tling of barriers to trade, securing the level of liberalisation which has been
achieved, transparency of existing barriers to trade, and procedures under the rule
of law in the case of infringements against the mutually adopted regulations.
Freedom of domicile
The right to freely and internationally select the location of an enterprise. Foreign
companies receive the same treatment as local ones (prohibition of discrimina-
tion).
Freedom of establishment
The right to choose one’s location and above all one’s place of work. When free
movement of labour is granted, foreign workers are entitled to the same treatment
as locals (ban on discrimination).
Freiburg Ordo Circle

This refers to a group of economists and lawyers (Walter →Eucken, Franz →Böhm,
Hans Großmann-Doerth) which formed during the 1930s at the University of
Freiburg. The basic idea was that in times of a progressively declining interna-
tional economic system (such as the then world economic crisis), and of increas-
ing state interventions and planning, to investigate the fundamental conditions of
the economic and social institutional orders (systems interdependence). The free-
dom of individuals in their role as political and economic citizens is at the core.
After 1945, these fundamentals played an important role when it came to putting
an end to state planning and the realisation of the →market economy in its form as
the →social market economy in the German Federal Republic (→economic orders,
→types of market economy).
Government/state ratio
The proportion of government expenditure in a country’s GDP.
Gross domestic product (GDP)

This is the term for the national product of a national economy (→circular flow of
incomes).
Historical School
An economic school of thought and field of research in Germany from the mid-
19th century.
486 Glossary
Hypertrophy
Excessive increase due to rising demand.
Innovation, innovator
The introduction (or introducer) of a new item into production (technical
progress) or the introduction of a new product.
Insider trading
Information resulting from professional activity must not be communicated to
third parties since this represents undue influence on the normal market process-
es. The Securities Trade Act prescribes this, for example, for the staff of banks in
order to prevent unfair trade practices.
Institutions/institutional order of economy

Economic and social structures are strongly influenced and shaped by institutions.
Institutions stabilise expectations and channel human behaviour. In economic
matters, the institutional framework provides orientation, scope and bounds for
economic action. Institutions are not only organisations with a material structure
and personnel; formal laws, rules and contracts are considered institutions, too, as
well as (not written) informal rules of conduct, shared history, traditions and val-
ues, norms, standards and attitudes. All these institutions give economic behav-
iour a specific stamp. Thus, for the achievement of the results envisaged by
society, the institutional framework, the institutional economic order, has to be
deliberately shaped by corresponding order policies (for an adequate economic,
social, monetary, environmental, etc. order). The modern school of institutional
economics is not only compatible with the school of economic analysis and poli-
cy developed by the fathers of the social market economy but even closely linked
to their order policy approach (Ordnungstheorie/Ordnungspolitik).
Insolvency
This refers to the inability to pay or the termination of payments as a consequence
of the lack of liquidity of enterprises or persons.
Issue, to issue
Securities intended for the stock exchange are issued. Potential issuers are enter-
prises (usually corporations), regional corporations (federal states, countries,
cities) and other government institutions or →public enterprises. The issue can be
placed directly or via the agency of a bank or several banks (consortium of banks),
which is the usual route.
Lag
The time between the implementation of an economic policy instrument and
its effect; for example, in the case of monetary policy the lag may be one to two
years.
Glossary 487
Laissez-faire
French: to let do (to let go); motto of extreme →liberalism (laissez-faire liberal-
ism). Demand for as little governmental interference in the economy as possible
(a ‘night watchman’ state), since the decisions of the individual economic agents
generate the best solutions, coordinated by the market.
Macroeconomics
As a sub-section of economic theory, macroeconomics investigates the interac-
tions of the aggregates of a national economy (savings, consumption, balance of
payments, state income and expenditure). Macroeconomic goals include
→growth, →distribution, →price level stability and →employment.
Margin tariff
A margin describes a range (with an upper and a lower limit). If, instead of a fixed
tariff, market participants have a margin prescribed to them inside which the tar-
iff can be freely negotiated, a margin tariff is applied.
Market conformity
This exists when government interference into the economic mechanism does
not really render the market processes less effective.
Marshall Plan
American Secretary of State George C. Marshall initiated the European
Programme of Reconstruction for Europe after it had been destroyed by the
Second World War (European Recovery Programme – ERP). The uniform aid
programme was passed by the American Congress in 1948; it is also referred to as
the Marshall Plan.
Materialism
In the philosophical doctrine of materialism all existing reality (including the soul,
the spirit and the mind) is reduced to material forces or conditions (as opposed to
idealism). The causes of social changes and revolutions are also exclusively attrib-
uted to altered relationships of production and exchange and not to personal con-
victions.
Mennonite
A Mennonite is a member of a popular Protestant free church that adheres to
strict religious discipline and rejects military service; named after Menno Simons
(1496–1561).
Mercantilism
This was the dominant economic policy in the Age of Absolutism (16th–18th
century). Its outstanding characteristic was that the state strongly influenced the
economy in order to increase prosperity and thus the power of the prince.
488 Glossary
Preferred methods included:

• the promotion of (labour intensive) trade and industry;
• an active population policy;
• the promotion of technology;
• restrictions on imports; and
• the stimulation of exports for the purpose of achieving an active balance of
trade.
Methodological individualism
The philosophical view that grants the individual priority over the community.
Microeconomics
As a sub-section of economics, microeconomics deals with the behaviour and the
decisions of single economic agents (private households, enterprises) inside a
national economy.
Money market papers

Vested property rights or short-term financial transactions traded in the money
market. They are contrasted with the long-term financial transactions and securi-
ties of the capital market.
Mont Pèlerin Society

An international association of liberal economists. Named after Mont Pèlerin
(Switzerland), where this group met for the first time in 1947.
Moral hazard
The term originated in insurance. It describes the following behaviour: the insur-
er only knows the normal material risk but not the total risk when the insured
generates an additional moral hazard. Due to a lack of information and opportu-
nities for control, the insurer is unable to separate and attribute the two risks, with
the effect that the insurance premium for everybody is increased. A textbook case
in the field of motor accident insurance is when, in the event of damage, minor
repairs are included in the claim despite these not having been caused by the acci-
dent. Where large, anonymous insurance companies (health insurance) or public
social services with partial redistribution (welfare state) are concerned, a number
of different attitudes arise, including: ‘one does not continually want to be a net
contributor’, ‘everyone does it’, and ‘honesty doesn’t pay’. This creates attitudes
of ‘moral hazard’, which add to the demand for services and make these systems
more expensive. The method of choice against this trend is increased considera-
tion of the relationship between individual risk and rate of contribution; the per-
sonal contribution as an element of the principle of the causative agent. One
example: ‘When it comes to mandatory insurance, are injuries caused by a sport
recognised as dangerous, a private risk or a general risk of the community?’
Glossary 489
Moral suasion and policy of influence

This is a qualitative economic policy instrument. Its aim is to influence the behav-
iour of the economic agents through reasoning. Moral suasion is successful in
cases when the representative of the economic policy could also intervene by
using harsher instruments.
Municipal factor
This term is mostly used in association with trade tax. Trade tax is arrived at by mul-
tiplying the nationally standardised trade tax (tax assessment rate) with a percentage
agreed by the municipality (municipal factor). The product is the actually applica-
ble tax rate. The levied rate can make a difference of several hundred per cent.
Ordnungspolitik/Ordnungstheorie see Institutions/institutional order of economy
Paradigm
A thought pattern, a model. A set of statements that are considered to be true.
Polluter-pays principle
The principle of the responsible party in environmental protection. The respon-
sible party covers the costs it has incurred.
Portfolio
The term is derived from the word portefeuille (bag with many partitions). It is used
to describe the composition of capital assets, for example their form (such as cash,
term deposits, bearer bonds, shares and land), and their proportions in order to
satisfy the different levels of readiness to take risks and expectations of returns.
Principal-agent approach/theory
This can arise in a limited company (where the principal is the owner and the
agent is management) and in a democracy (principal: the voter; agent: the gov-
ernment, the politician). The model deals with the problems of cooperation and
dependency of two individuals who are responsible for the success of an action.
The individual who decides on what action to take (the agent) can maximise his
or her own benefit, but not necessarily that of the other party (the principal). For
this reason, the other party will try to influence the choice of action. Here, prob-
lems arise primarily from a lack of information, the costs of drawing up the con-
tract and differing attitudes of the cooperating individuals towards maximising
benefits. Thus it is assumed that a social optimum is no longer automatically gen-
erated through the market. Examples are relationships between the owner and the
manager of an enterprise or the voters and politicians of a party. In a public limit-
ed company (plc), the management has an information advantage over the share-
holder, and this can lead to the agent’s advantage over the principal when it comes
to realising their respective aims.
490 Glossary
Principle of equivalence
The idea here is that service and counter-service must be of equal value. The prin-
ciple of equivalence finds application in many areas of the economy. Example: to
establish how a service is to be remunerated and how, in any pension insurance
scheme, to relate pension pay-outs to contributions.
Property rights
Property rights (rights of ownership) determine the allocation of legal claims
between individuals, e.g. for resources. These are not necessarily formal, legal
rights of ownership. A distinction must be made here between the various forms
of rights to use, the right to carry out alterations or modifications, the right to
derive profits or losses as well as the right of disposal. The less concretely these
rights are distributed among different individuals, the less efficient is the process
of production itself and its results (→property).
Protectionism
This describes a world trade order in which private and above all government
measures (customs duties, non-tariff-related obstacles, quantitative restrictions)
restrict the international exchange of goods and services. The ideal situation with-
out such obstacles is free trade. The implementation of protectionist measures in
the payments system and capital transactions is referred to as control of capital
movement and foreign exchange control. Restrictions on the free choice of the
place of work abroad are referred to as restricted freedom of labour movement.
This similarly applies when the freedom of establishment for companies is abol-
ished or is subjected to controls which apply only to foreigners. The →European
Economic and Monetary Union aims to establish a situation free of discrimination
and protectionism.
Public choice school/theory

This concerns the analysis of the public decision-making process. Key is the rela-
tionship between the citizens and the public collective decisions that are not mar-
ket related. Issues involved are:
• calculation of the requirement of public goods;
• the determination of an optimal budget;
• when a budget should be financed through taxes or borrowings; and
• how to determine the optimal size of collective entities for decision-making.
Rational principle
The principle for economic acting. The rational principle describes the behaviour
of the economic agents according to which every activity is carried out along the
lines of the rational economic principle with the aim of realising a certain eco-
nomic success with the least possible utilisation of means (minimum principle);
or of realising the greatest possible success of production (number of products)
with a certain use of means (raw materials, working hours) (maximum principle).
Glossary 491
Real income and real purchasing power

The real purchasing power of the monetary income and the income in real terms
are closely associated. The income in real terms expresses the quantity of con-
sumer goods which a consumer can acquire with a certain income. It is an indi-
cator for the purchasing power in real terms. The real values are calculated by val-
idating (dividing) the nominal (numerical) monetary incomes or the nominal
purchasing power (purchasing power at current prices) by a price index (usually
the price level of consumer prices). When the prices of consumer goods rise, the
income in real terms decreases because fewer goods can be bought with a certain
monetary income.
Recession
A recession describes a →business cycle phase where a decrease of the →growth of a
(national) economy can be observed. It is considered to be the case when for two
consecutive quarters, the GDP has manifested negative growth rates.
Refinancing
A loan which the credit grantor (e.g. a bank) grants not with its own means (its
own capital) but with foreign means (e.g. savings deposits), has to be refinanced
(financed with other means) when the depositor withdraws the deposit. Third
persons make this refinancing process possible through their deposits.
Savings deposits
Deposits that exclusively serve the accumulation or the investment of assets are
classified as savings deposits through an official document (especially the savings
account).
Shareholder value
Shareholder or share-owner value. The shareholder value approach considers all
shareholders associated with an enterprise as shareholders (owners of shares). It is
the aim of the entrepreneurial policy to increase the shareholder value and thus,
through entrepreneurial strategy and policy, to maximise the value of the shares or
the assets of the owners of the limited company.
Sight deposits
Account deposits in banks and savings banks that are due at any time are called
sight deposits. The best-known variety is the current account for the purpose of a
cashless payment system.
Solidarity
A sense of fellowship, standing in for one another, closely associated. It always
presupposes at least two persons. The larger the group, the less personal this sense
becomes. Problems may arise concerning whether or not one can still have a sense
of solidarity with the group.
492 Glossary
Solvency
An enterprise is solvent if it is able to fulfil its payment obligations at any time.
Solvency is the sum of the available financial means at a certain point in time.
Subsidiarity
Subsidiarity describes a principle of competences and responsibility in a society. It
is assumed in a society that individuals and small groups (such as families) are
generally able to take responsibility for their affairs (at the ‘bottom’ level).
Decisions must be passed on to the next highest level (such as the municipality,
federal state, federal government) to be solved only when they go beyond the
competences of understanding, decision or solution of the ‘bottom’ level. A trans-
fer is useful when the effects go far beyond one’s own area of competence (exter-
nal effects).
Subsistence level
The level of existence, degree of provision, material level of existence, usually for
single persons or a family.
Substitution
The replacement of a good or a factor of production through another good or fac-
tor of production that yield an equal or greater benefit. Mostly these goods are
qualitatively or quantitatively identical (examples: butter, margarine).
Subsumption
The ordering or summarising of terms under generic terms is referred to as sub-
sumption. Terms of a narrower range are subsumed under terms of a wider range
(example: the attribution of a fact to a legal norm).
Synergy effects
These arise when several effects, when put together, have a greater effect than
could be expected from the addition of the separate effects. Mostly, effects are
generated independently from one another and connect thereafter or are con-
nected. In this way, it is possible to utilise already existing assembly lines for the
manufacture of a new product. Synergy effects are particularly expected after the
merger of enterprises.
Terms of trade
Terms of trade describe the actual trade relationship of import and export between
different states or trading blocs. They are calculated by dividing the export price
index by the import price index. When the prices for raw materials are strongly on
the rise, the import price index increases. When, in that case, export goods prices
remain unchanged, the terms of trade falls. This means that more export goods
have to be offered abroad in order to be able to pay for the imported goods.
Glossary 493
Time deposits
Deposits in accounts in banks or savings banks that fall due at an agreed or legal-
ly determined date are referred to as time deposits. Excluded from these are sav-
ings deposits and sight deposits (deposits for periods of less than 30 days).
Trade-off
A term in economics that above all describes conflicting aims. When conflicting
aims are assumed between the stability of monetary value and full employment,
there would be a trade-off because a higher level of →employment could be
achieved only through violation of the aim of monetary stability. This relationship
is assumed in the Phillips Curve.
Transaction, transaction costs

In economic terms, a transaction corresponds to an exchange of goods or servic-
es. The costs associated with the agreement to engage in the corresponding
exchange are described as transaction costs. They arise through the collection of
information on potential trading partners and prices, and are also dependent on
the time required for the collection of this information.
Utility
Utility describes a measure of subjective need satisfaction experienced by a con-
sumer through the consumption of a good or a service at a particular time and place.
Value-added chain
The value-added chain describes the emergence of goods or services from raw
materials via the stages of production to finished products. The value-added chain
occurs in private enterprises (from acquisition to production to sale) and in a
national economy (from raw materials to half finished products to finished prod-
ucts). Value-added includes the costs incurred (including the costs of machinery,
labour, interest) in the course of the process of production.
Volatility
A term which is above all applied to exchange rate fluctuations in the foreign
exchange markets. An exchange rate that in the course of the day or over a longer
period of time shows significant changes in value in both directions is called a
volatile rate.
Win-win situation
The term belongs to games theory. It describes a situation where as a result of the
actions taken, two players end up in a better position than they were initially –
both have won. The point of departure is that there is not only one winner (the
so-called zero-sum game: the losses of one player are the gains of the other), but
that throughout the game several players can achieve successes (the so-called mul-
tiple-sum game).
495
Sub-division of themes
Basics
Alternative institutional framework – Concepts and economic orders 496
Basic economic concepts 496
Social market economy – concepts 497
Economic policy in the social market economy
Competition: Institutional order and policy 497
Currency and monetary policy 497
Economic policy actors 498
Economic policy objectives 498
Environmental protection and policy 498
European Union 499
Financial constitution and policy 499
International economic order and policies 500
Labour market and employment 500
Reunification 500
Social system and policy 500
Special policy areas 501

496 Sub-division of themes
Basics
Alternative institutional frameworks – Concepts and

economic orders
Conservatism 120
Constructivism 122
Institutional order policy (Ordnungspolitik) and process policy 270
Interventionism 290
Keynesianism 293
Liberalism 303
Market economy 307
Monetarism 317
New economy 320
Basic economic concepts

Business cycles 95
Circular flow of incomes, national income and national product 106
Concentration 114
Income 254
Individual responsibility 260
Markets and prices 312
Profit 350
Property 354
Social capital 389
Speculation 435
Statistics 436
Social Market Economy – Concepts
Achievement principle 80
Competition 111
Economic ethics 141
Social market economy
– An introduction 393
– Concept of man 395
– Political implementation 401
– Principles and functioning 407
– Social irenics 416
Economic policy in the social market economy
Competition: Institutional order and policy

Deregulation 135
Patent system 331
Subsidies and government assistance 441
Currency and monetary policy

Capital markets 98
European monetary policy:
– Actors 178
– Aims and duties 179
– Instruments 180
– Strategies 182
Monetary order 318
Economic policy actors
Chamber system 103

Concerted Action and Alliance for Employment (Konzertierte Aktion/Bündnis für Arbeit) 116
Council of Experts 128
Federal Republic (Bund), federal states (Länder) and municipalities 232
Parastatals 329
Social partners 418
Economic policy objectives

Distribution 139
Employment 153
Growth 245
Education and research policy

Environmental protection and policy

Environmental policy
– actors 165
– conflicting aims 167

– instruments 167
Sustainability 448
European Union

EU: Budgeting 186
EU: Enlargement 197
EU: History 202
EU: Reforms and consolidation
– economic aspects 211
– political aspects 214
EU: Selected Policy Areas

– EU: Agricultural policy and enlargement east 183
– EU: Competition policy 190
– EU: Education and research policy 192
– EU: Employment policy 194
– EU: Environmental policy 200
– EU: Industrial, research and technology policy 203
– EU: Regional and structural policy 217
– EU: Social policy 220
– EU: Trade policy 222
– EU: Transport policy 224
Financial constitutional and policy

Privatisation 347
Public debt 361
Public revenue 367
Public-private partnerships 371
Tax policy 451
International economic order and policies

Foreign trade 238
Globalisation 241
Integration 274
Labour market and employment
Co-determination 107
Industrial relations constitution 266
Labour law 295
Shadow economy 385
Reunification

Reunification:
– Monetary, economic and social union 380
– Monetary union through currency conversion 383
Social system and policy

Family policy 226
Housing policy
– Old federal states (Länder) 249
– New federal states (Länder) 251
Poverty 340
Social budget 386
Social policy 420
Social system 426
Special policy areas
Consumer policy 126
Housing policy
– New federal states (Länder) 249
– Old federal states (Länder) 251
Media policy 313
Middle class policy 316
503
Abbreviations
AI Accident insurance
AQ Age quotient
ARC Act Against Restraints of Competition
ASM Social Market Economy Action Group
CA Centesimus Annus
CAP Common agricultural policy
CDU Christian Democratic Union
CEMR Council of European Municipalities and Regions
CFSP Common Foreign and Security Policy
CJI Justice and the Interior
Comecon Council for Mutual Economic Cooperation
CPI Consumer price index
CPR Committee of Permanent Representatives
CSU Christian Social Union
DM Deutsche Mark
EBIT Earnings before interest and taxes
EBITDA Earnings before interest and taxes, depreciation and amortisation ratio
EC European Community
ECB European Central Bank
ECCS European Community for Coal and Steel
ECS European Currency System
EC-T European Community Treaty
ECU European Currency Unit
EEC European Economic Community
EFTA European Free Trade Area
EIB European Investment Bank
EMAS Environmental Management and Auditing System
EMS European Monetary System
EMU European Monetary Union
EP European Parliament
EPC European Policy Cooperation
ERP European Recovery Programme
ESC Economic and Social Committee
ESCB European System of the Central Banks
EU European Union
EuAG European Auditor General
EuCJ European Court of Justice
Euratom European Atomic Energy Community
EU-T European Union Treaty
FCO Federal Cartel Office
FDI Foreign direct investment
FDP Free Democratic Party
FEA Federal Employment Agency
FSO Federal Statistical Office
504 Abbreviations
GATS General Agreement on Trade in Services

GATT General Agreement on Tariffs and Trade
GDP Gross domestic product
GDR German Democratic Republic
GNI Gross national income
GNP Gross national product
HIPC Heavily Indebted Poor Countries
ICT Information and communication technologies
IFRS International Financial Reporting Standards
ILA International Labour Agency
ILC International Labour Conference
ILO International Labour Organization
IMF International Monetary Fund
IT Information technology
KAS Konrad-Adenauer-Stiftung
NAFTA North American Free Trade Association
NAP National Action Plan
NCB National central bank
NRR Net reproduction rate
NRU Natural rate of unemployment
OECD Organisation for Economic Cooperation and Development
ÖVP Österreichische Volkspartei
PDS Party of Democratic Socialism
PLC Public limited company
PP Production potential
PPP Public-private partnership
PRS Poverty Reduction Strategies
QA Quadragesimo Anno
R&D Research and development
RAB Regional Advisory Body
RN Rerum Novarum
RSP Regional and structural policy
SME Small- and medium-sized enterprises
SPD Social Democratic Party
SPÖ Sozialistische Partei Österreichs
StabG Act to Promote Economic Stability and Growth
(Gesetz zur Förderung der Stabilität und des Wachstums der Wirtschaft)
TRIPS Trade-Related Aspects of Intellectual Property Rights
UK United Kingdom
UN United Nations
UNO United Nations Organization
US United States
US-GAAP US-Generally Accepted Accounting Principles
VAT Value added tax
WTO World Trade Organization
505
List of tables, figures and other illustrations
• Turnover in percent of the six largest companies in Germany in their 82

respective industries, 2001–2004
• Percentage of employees in Germany with binding wage agreements, 1996–2006 110
• Competition and its functions in a market economy 112
• Average life expectancy in Germany, 1871–2005 132
• Average gross private household income in Germany in 2003 (s3,561) 139
earned by assets, employment and public transfer payments
• Average net income of the household’s main income recipient for several 140
job positions in Germany in 2003
• Germany’s education system – key data 147
• Private education funding in Germany 150
• Government education funding in Germany 152
• Fluctuations in the German job market, 1996 and 2005 158
• Air pollution in Germany, 1990-2004 164
• European Economic and Monetary Union (EEMU) 176
• EU Budget 2007: Resources by type of revenue 189
• Member states of the European Union and candidate countries, 2007 (map) 199
• Organs of the European Union 209
• Chronological listing of expansions and of membership applications in the EU, 212
1961–May 2007
• Vote distribution in the EU Council and the EU Parliament (EP) in terms 216
of the Treaty of Nice
• Comparative prosperity in the European Union 218
• Mergers in Germany, 1973–2004 227
• Organisational chart of the Federal Cartel Office 228
• German balance of payments, 2006 239
• The expansion of world trade, 1980–2006 242
• Transnationality Index of host economies, 2002 244
• Purchasing power of one wage minute in Germany, 1960–2005 246
• Composition of total national income (Germany), 1996 and 2006 255
• Income equality: Gini Index of the last available year between 1985 and 2004 256
• Calculation of the Gini Index 257
• External debt of Heavily Indebted Poor Countries (HIPC) in 2005 258
• Rules for industrial action 262
• Brief summary of some international organisations 288
• GATT negotiations on the reduction of customs tariffs 289
• Transparency International Corruption Perceptions Index 2007 292
506 List of tables, figures and other illustrations
• Income statement of Volkswagen AG, 2005 and 2006 352

• Balance sheet of Volkswagen AG as at 31 December 2006 353
• Germany’s federal and regional debts, 1950–2006 362
• General government consolidated gross debt of the EU-27 as a percentage of GDP 363
• Distribution of taxes and contributions in Germany, 1965–2006 368
• Income tax plus employee and employer social security contributions, 370
1998 and 2006
• Financial grants and subsidised investment volumes in Germany, 1990–1998 374
• Conversion rates based on a non-inflationary DM supply for the GDR 382
• Main areas of social expenditure in Germany listed by sector, 2006 387
• German social budget, 1991–2006 388
• Correlated types of justice 392
• Fundamental structure of the social market economy 408
• Germany’s solidarity surtax revenue, 1991–2008 434
• German employment by industry sector, 1882–2005 439
• Development of financial aid and tax relief measures of the German 442
federal government, 1970–2004
• Price formation in a commodity market 446
• Global Competitiveness Index: 2006 and 2005 comparisons 450
• Third ways: Mixed economy 454
• Types of market economy matrix 461
• Different categories of unemployment 464
• Distribution of unemployment by different groups in Germany, 1995–2005 466
• Rate of unemployment by educational background in Germany, 1991–2004 467
Photographs
• Franz Böhm (Foto Mucke, Frankfurt/M.) 29

• Ludwig Erhard (Presse- und Informationsamt der Bundesregierung) 34
• Walter Eucken (Archiv für Christlich-Demokratische Politik der 36
Konrad-Adenauer-Stiftung)
• Friedrich August von Hayek 40
• Alfred Müller-Armack (Presse- und Informationsamt der Bundesregierung) 52
• Wilhelm Röpke (Aktionsgemeinschaft Soziale Marktwirtschaft e.V.) 59
• Alexander Rüstow 63
507
List of contributors
Althammer, Jörg, Prof. Dr, Chair of Social Policy and Social Economics, University of
Bochum; areas of research: social security systems, labour market theory, distribution theory.
Anderegg, Ralph G., Prof. Dr, Department of Economic Policy, University of Cologne; areas
of research: economic policy, agricultural policy, international trade relations.
Apolte, Thomas, Prof. Dr, Institute of Economic Education, University of Münster; areas of
research: institutional competition, European integration, new institutional economics, sys-
tems comparison and transformational economics, theory and policy of retirement provi-
sion.
Baltes, Peter T., Dr, assistant lecturer, Department for Financial Sciences, University of
Trier; areas of research: new institutional economics, economics of external security, defence,
disarmament and conversion.
Baumgärtner, Frank, economist, assistant lecturer at the Institute for Economics, Chair for
Foreign Trade at the University of Hohenheim; areas of research: European integration,
EMU, European regions, and fiscal federalism.
Behrens, Peter, Prof. Dr, field of expertise, jurisprudence, University of Hamburg, member
of the Board of Directors of the Institute for Integration Research at the Europa-Kolleg
Hamburg; areas of research: international economic law, European law, law and economics.
Belke, Ansgar, Prof. Dr, Institute for Economics, Chair of Foreign Trade, University of
Hohenheim and Research Institute on the Future of Employment in Bonn; areas of research:
employment, economic fluctuations, macroeconomics of open economies, quantitative
economic research.
Bender, Dieter, Prof. Dr, Chair of International Trade Relations, University of Bochum; areas
of research: foreign trade, economic development, developing countries.
Bofinger, Peter, Prof. Dr, Chair of Economics, Money and International Trade Relations,
University of Würzburg; areas of research: financial theory and policy, monetary theory and
policy, European integration, economic transformation, reform of social security systems.
Böhle, Detlef, Dr, German Federation of Chambers of Trade and Industry, director of the
Department Asia-Pacific.
Bossert, Albrecht, Dr, assistant lecturer, Department of Environmental and Resources
Economics, University of Augsburg; areas of research: economic and social policy, institu-
tional economic order policy, development policy, environmental economics.
Boving, Dagmar, Dr, director of the Department Europe/Overall European Coordination in
the German Chamber of Trade and Industry.
Cieleback, Marcus, Dr, real estate market analyst with Meag Munich Ergo Asset
Management, Munich.
Clapham, Ronald, Prof. Dr (retired), Chair of Economics and Economic Didactics, University
and Comprehensive University (polytechnic) Siegen; areas of research: economic systems,
industrial economics, developing countries and market economy.
Clever, Peter, retired permanent secretary, independent business consultant, former mem-
ber of the administrative board of the International Labour Organisation, former member
of the administrative board and deputy member of the board of directors of the Federal
Labour Agency, advisor of the Central Committee of German Catholics and of the
German Synod of Bishops.
Dickertmann, Dietrich, Prof. Dr, Chair of Financial Science, University of Trier; areas of
research: the theory and policy of public debt, the theory and policy of subsidies, fiscal pol-
508 List of contributors
icy, the state and the issuing bank, public enterprises, environmental protection and the
public budget.
Dietrich, Diemo, Dr, Department of Business Cycles and Growth, Institute for Economic
Research, Halle; areas of research: international credit markets, regulations of financial insti-
tutions.
Diller, Klaus Dieter, Prof. Dr, Management Institute of the University of Koblenz-Landau;
area of research: financial science.
Donges, Juergen B., Prof. Dr, professor in the Economic Policy Department, University of
Cologne; areas of research: foreign trade, macroeconomics and monetary economics, eco-
nomic policy.
Eickhof, Norbert, Prof. Dr, Chair of Economics, especially economic policy, University of
Potsdam; areas of research: regulatory policy, competition economics, industrial, research
and technology policy, sectoral economic policy (especially agricultural, transport, energy
and media policy).
Endres, Alfred, Prof. Dr, Chair of Economics, especially economic theory, Distance
University Hagen and Chair of Integrative Environmental Economics, private University
Witten/Herdecke; areas of research: environmental and resources economics, economics of
law, information economics.
Eppendorfer, Carsten, Dr, expert on European Policy in the Ministry of Finance; main focus:
European Economic and Monetary Union, institutional issues of the ECB, European
financial markets.
Feess, Eberhard, Prof. Dr, Chair of Economics, especially microeconomics, Technical
College Aachen; areas of research: environmental economics, environmental policy.
Fritz, Gernot, Dr, retired permanent secretary, federal civil servant until 1999 (at the Federal
Employment Ministry, at the Office of the Federal Chancellor and lastly deputy head at
the Office of the Federal President); since then solicitor.
Fritz-Aßmus, Dieter, Dr, assistant lecturer at the Institute for Economic Policy, University
of the Federal Armed Forces in Hamburg; areas of research: industrial economics, competi-
tion policy, institutions economics, history of dogma, foreign trade policy.
Gabisch, Günter, Prof. Dr, professorship in Economics, particularly the theory of econom-
ic fluctuations and growth, University of Göttingen; areas of research: the theory of
economic fluctuations, the theory of growth and foreign trade, economic simulation mod-
els.
Gerding, Rainer, Dr, secretary of the Trade and Commerce Committee of the CDU, regis-
tered association, in Berlin.
Gerken, Lüder, PD Dr, head of the Regulatory Policy Foundation in Freiburg i. Br. and man-
aging secretary of the Friedrich-August-von-Hayek-Foundation; areas of research: institu-
tional economic order policy, political economics.
Goldschmidt, Nils, Dr, research Consultant at the Walter Eucken Institute in Freiburg i. Br.;
areas of research: economic and social policy, cultural economics, economic ethics.
Gröner, Helmut, Prof. Dr (retired), Chair of Economics, Economic Policy, University of
Bayreuth; areas of research: main emphasis on competition policy, energy management pol-
icy, international trade relations, institutional economic order.
Gutmann, Gernot, Prof. Dr Dres. h. c. (retired), Chair for Economics with emphasis on sys-
tems comparison at the Department for Staatwissenschaftliches Seminar (Economics) at
the University of Cologne; areas of research: economic orders comparison, institutional eco-
nomic order policy.
Habermann, Gerd, Prof. Dr, director of the Entrepreneur Institute of the Working Committee
of Independent Entrepreneurs, registered association; honorary professor at the University
of Potsdam; co-founder and secretary of the Friedrich August von Hayek Society.
Habisch, André, Prof. Dr, Chair of Christian Social Ethics and Social Policy at the Catholic
University Eichstätt, director of the Central Institute for Marriage and Family in Society;
areas of research: Christian social ethics, social policy.
Hamer, Eberhard, Prof. Dr, head of the Institute for the Middle Classes, Lower Saxony in
Hannover, founder and president of the German Foundation for the Middle Classes,
former professor of Economic and Financial Policy at the University of Bielefeld,
Solicitor.
Hamm, Walter, Prof. Dr (retired), Chair of Economics at the University of Marburg; areas of
research: economic systems, industrial economics, institutional economic order policy,
transport policy, cooperativism.
Hansjürgens, Bernd, Prof. Dr, Sector Economics, Sociology and Law of the Environmental
Research Centre in Leipzig-Halle Ltd., professor at the University of Halle-Wittenberg;
areas of research: environmental and resources economics, financial sciences.
Hartwig, Karl-Hans, Prof. Dr, director of the Institute for Transport Science of the
University of Münster, publisher of the List Forum for Economic and Financial Policy;
areas of research: transport policy, economic systems, institutional economic order policy.
Hasse, Rolf H., Prof. Dr, former director of the Institute for Economic Policy at the
University of Leipzig, president of the Leipzig Economic Policy Society, director of the
Centre for International Trade Relations in Leipzig; acting manager of Fraunhofer-
Zentrum für Mittel- und Osteuropa (MOEZ); areas of research: institutional economic
order policy, European integration, international trade and currency policy.
Hegner, Jan, Dr, director Strategic Sourcing, Freightliner LLC, DaimlerChrysler
Commercial Vehicle Division, Portland, Oregon.
Heilemann, Ullrich, Prof. Dr, director of the Institute for Empirical Economic Research at
the University of Leipzig, vice-chairman of the FERI AG in Bad Homburg; areas of research:
economic cycle analysis and prognosis, financial policy, econometric models.
Hemmer, Hans-Rimbert, Prof. Dr, Chair of Economics and Research into Developing
Countries at the University of Gießen; member of the academic advisory committee in
the Federal Ministry for Economic Cooperation and Development; areas of research: child
labour, micro und macro determinants of poverty in developing countries, poverty and
poverty control in the transformation process.
Hinz, Hans Werner, Dr, former head of the legal department of the German Federation of
the Chamber of Trade and Industry.
Höfer, Heinrich, Dr, head of the Department for Technology and Innovation Policy at the
Federal Association of German Industry in Berlin.
Honecker, Martin, Prof. Dr (retired), Department of Social Ethics and Systematic Theology
of the University of Bonn; area of research: social ethics.
Ignatjuk, Marina, business graduate, assistant lecturer at the Economic Policy Institute,
University of Leipzig; areas of research: international trade relations, change management
and globalisation.
Immenga, Ulrich, Prof. Dr Dr h. c. (retired), professor of Jurisprudence at the University
of Göttingen; areas of research: main focus on competition law, company law, economic law,
international private law.
Karl, Helmut, Prof. Dr, Chair of Economic Policy III, University of Bochum; area of research:
regional theory and policy, environmental and resources economics.
Kleinhenz, Gerhard D., Prof. Dr, Chair of Economic and Social Policy, University of Passau,
member of the Academic Advisory Board for Family Issues at the Federal Ministry for
Family, the Elderly, Women and Youth; areas of research: general economic policy with spe-
cial emphasis on institutional economic order policy, social policy with special emphasis
on retirement provision and family policy and, labour market policy.
Klemmer, Paul, Prof. Dr (retired), Chair of Economic Policy III, University of Bochum,
president of the Rhenish-Westphalian Institute for Economic Research (RWI), chairman
of the Ruhr Research Institute for Innovation and Structural Policy (RUFIS); areas of
research: resources policy, urban and regional policy.
Klinger, Sabine, economist, assistant lecturer at the Institute for Labour and Employment
Research in Nürnberg; areas of research: econometrics of simple and multiple equation
models – methodological principles, economics of stocks and flows, influence of existing
assets on the consumption of private households.
Kloten, Norbert, Prof. Dr Dres. h. c. (retired), honorary professor of Economic Policy,
University of Tübingen, former president of the Regional Central Bank, former chairman
of the Board of Experts for the analysis of general economic development; areas of research:
economic policy with special emphasis on institutional economic order policy, financial
and currency policy.
Klump, Rainer, Prof. Dr, Chair of Economics with special emphasis on Economic
Development and Integration, University of Frankfurt/M.; areas of research: economic
development and international trade relations.
Knappe, Eckhard, Prof. Dr, Department IV (Economics), Services Administration and
Management, University of Trier, director of the Centre for Health Economics; areas of
research: social policy, health economics.
König, Reiner, Dr, former head of the main Economics Department of the German Federal
Bank, member of the Monetary Policy Committee of the European System of Central
Banks and of the EU Economic Policy Committee.
Kösters, Wim, Prof. Dr, Chair of Economic Theory I, University of Bochum, member of
the directorate, Rhenish-Westphalian Institute for Economic Research, Essen, and MD
of the Institute for European Trade and Commerce; areas of research: monetary theory and
policy, theory of economic cycles and stability policy, monetary theory and policy, labour
market theory and policy, integration theory and policy with emphasis on issues of mon-
etary integration, international trade policy.
Kramer, Rolf, Prof. Dr (retired), Department for Systematic Theology with special empha-
sis on social ethics, Humboldt University, Berlin; areas of research: personal ethics, eco-
nomic ethics, social ethics.
Krüsselberg, Hans-Günter, Prof. Dr (retired), Chair in the Seminar für Wirtschaftliche
Staatswissenschaften, University of Marburg; member of the academic advisory board for
family policy in the Federal Ministry for Family, the Elderly, Women and Youth; areas of
research: political economics, competition theory and policy, labour market and distribution
theory and policy, social and family policy.
Lachmann, Werner, Prof. Dr h. c., PhD., Chair of Economic and Development Policy,
University of Erlangen-Nürnberg; areas of research: origin and ethics of the social market
economy, market economy in developing countries, international competition policy,
financial policy, economic ethics.
Lampert, Heinz, Prof. Dr (retired), Chair of Economics with special emphasis on econom-
ic and social policy, University of Augsburg; areas of research: theory and policy of institu-
tional economic orders, theory of the social market economy, social policy with special
emphasis on labour market policy and family policy.
Lauk, Kurt J., Prof. Dr, member of EP, president of the Economic Affairs Council of the
CDU, registered association, of the Institut Franco-Allemand, director of the
International Institute of Strategic Studies in London, honorary professor at the European
Business School in Reichertshausen, Eltville; areas of research: corporate governance and
management in the global economy.
Leiendecker, Annemarie, economist, Schneider Organisational Consultancy (advisory cen-
tre Rhineland Palatinate, Labour Market Integration for the Underprivileged, technical
assistance for the European Social Fund), Trier.
Leipold, Helmut, Prof. Dr, Institute for Comparative Economic Systems, University of
Marburg; areas of research: main focus on economic systems, transformation and integration
of economic systems.
Leonhardt, Katrin, Dr, company secretary, Department for Promotional Policies at the Bank
for Reconstruction, Frankfurt/M.
Leschke, Martin, Prof. Dr, Chair of Economics 5, especially institutional economics,
University of Bayreuth; areas of research: institutional economics, monetary policy,
European integration, current economic policy.
Leven, Franz-Josef, Dr, German Securities Institute, registered association in Frankfurt/M.
Lith, Ulrich van, Prof. Dr, Rhein Ruhr Institute for Economic Policy, University of Cologne;
areas of research: economic policy; economics of institutions, education and research.
Martin, Reiner, Dr, principal economist, Convergence and Structural Analysis Unit,
European Central Bank, Frankfurt/M.
Menck, Karl Wolfgang, Dr, World Economic Archive, Hamburg; area of research: developing
countries.
Michels, Winfried, academic director, Dr, managing eirector of the Institute for Settlement
and Housing, University of Münster; areas of research: housing and housing policy, region-
al economics, labour market economics.
Mittag, Jürgen, Dr, managing director of the Institute for Social Movement and of the Ruhr
Foundation Library, University of Bochum; areas of research: European integration, soccer
and sports policy.
Molsberger, Josef, Prof. Dr Dr h. c. (retired), Chair of Economics, with special emphasis on
international economic policy, University of Tübingen; areas of research: international trade,
economic systems.
Neimke, Markus, Dr, Federal Ministry of Finance, Department for International Finance
and Currency issues.
Never, Henning, Dr, Deutsche Telekom AG.
Oberender, Peter, Prof. Dr Dr h. c., Chair of Economic Theory, University of Bayreuth,
member of the Bavarian Bioethics Commission, director of the Research Centre for Social
Law and Health Economics and of the Institute for Applied Health Economics; areas of
research: international trade, competition theory, health economics.
Okruch, Stefan, Dr, rector of the Faculty for International Relations, Andrássy University,
Budapest.
Papier, Hans-Jürgen, Prof. Dr, Chair of German and Bavarian Public and Administrative
Law as well as Public Social Law, University of Munich; president of the Federal
Constitutional Court; areas of research: fundamental rights, public economic law, environ-
mental law.
Paul, Stephan, Prof. Dr, Chair for Applied Business Studies II, Finance and Credit
Management, University of Bochum; areas of research: business finance, theory of interme-
diation, regulation, banks and the management of risks and returns.
Piazolo, Daniel, Dr, assistant lecturer at the research institute Financial and Economic
Research International (FERI), Bad Homburg; areas of research: European market analyses
and valuations.
Piel, Viktor Wilpert, economist, associate lecturer for Economics and Social Sciences,
Mathematics, and Information Technology, University of Trier.
Piepenschneider, Melanie, Dr, head of the Konrad-Adenauer-Stiftung Academy, associate
lecturer at Humboldt University, Berlin; area of research: European integration.
Pies, Ingo, Prof. Dr, Chair of Economic Ethics, University of Halle-Wittenberg, academic
director of the Wittenberg Centre for Global Ethics; areas of research: economic ethics, insti-
tutional economics and economic order policy.
Preuße, Heinz Gert, Prof. Dr, Department of Economics, especially international econom-
ic policy, University of Tübingen; areas of research: tendencies to regionalisation in America,
world economy and globalisation, foreign trade and development, world trade order.
Quaas, Friedrun, Prof. Dr, Institute for Economic Policy, University of Leipzig; areas of
research: history of economic theory, economic policy, ethics and economics.
Rappen, Hermann, economist, academic associate of the research group Public Finances and
Taxes, Rhenish-Westphalian Institute for Economic Research; areas of research: financial and
macroeconomic analysis of public budgets, financial equalisation, financial policy prob-
lems of German unification.
Rauscher, Anton, Prof. Dr Dr h. c. (retired), Chair of Christian Social Doctrine, University
of Augsburg, director of the Centre for Catholic Social Sciences; areas of research: econom-
ic ethics, economic and social systems.
Reeder, Wolfgang, economist, independent consultant for economics and politics as well as
management training.
Richard, Marc, economist, assistant lecturer in the Department for International Business
Accountancy, University of Bochum; areas of research: international accounting, business
accounting and company valuations.
Roos, Lothar, Prof. Dr (retired), Department for Christian Social Doctrine and Pastoral
Sociology, University of Bonn; areas of research: questions of principle and application of the
Catholic social doctrine, ethical principles of the political and economic order.
Rösner, Hans Jürgen, Prof. Dr, Department for Social Policy, University of Cologne; area of
research: labour economics, international social policy and social policy development coop-
eration.
Ruckdäschel, Stephan, Dr, manager, Disease and Care Management, Pfizer Inc., Karlsruhe.
Rudolf, Thomas, economist, associate lecturer in the Department of Economic Theory,
University of Bayreuth; areas of research: competition theory, institutional economics and
health economics, public private partnerships.
Schäfer, Wolf, Prof. Dr, Institute for Theoretical Economics, University of the Armed
Forces, Hamburg; areas of research: international trade relations, money and currency,
macroeconomic theory, institutional economic order theory, public choice.
Scharrer, Hans-Eckart, Prof. Dr (retired), Chair of Economics, University of the Armed
Forces, Hamburg, former vice-president of the World Economic Archive in Hamburg;
areas of research: monetary and real economic aspects of European and international eco-
nomic integration.
Schlecht, Christian Otto, Prof. Dr (†), former chairman of the Ludwig Erhard Foundation,
former Secretary of State in the Federal Ministry of Economics.
Schmitz, Wolfgang, C.R. Dr Dr h. c., former Federal Finance Minister (Austria), former
president of the Austrian National Bank; areas of research: economic systems, public finance.
Schneider, Hermann, Dr, associate lecturer at the Konrad-Adenauer-Stiftung (KAS) in St.
Augustin (near Bonn); former head of the KAS foreign offices in Colombia, Argentina and
Chile.
Schönig, Werner, Prof. Dr, professor in the Department of Social Sciences, Catholic
University for Applied Science North Rhine-Westphalia, Cologne, expert member of the
Enquete Commission ‘Communes’ of the Rhineland-Palatinate regional parliament; areas
of research: poverty and social scope, economics of social work, communal concepts of
action.
Schoser, Franz, Dr, former chairman of the German Federation of Chambers of Trade and
Industry, Berlin.
Schüller, Alfred, Prof. Dr, Chair of Institutional Economic Order Theory and Economic
Policy, University of Marburg, director of the Institute for Comparative Economic
Systems; areas of research: comparative analysis of economic systems, institutional econom-
ic order, international trade and monetary relations.
Schumann, Alexander, Dr, Mitteldeutscher Rundfunk (Central German Radio
Broadcasting), Leipzig.
Schumm, Andreas, economist, assistant lecturer in the Economics Department, especially
Economic Policy I, University of Tübingen; areas of research: research and technology pol-
icy.
Seitel, Hans Peter, PD Dr, former incumbent of the Chair of Economic Policy, University
of Mainz; areas of research: competition policy and deregulation, international institutional
economic order policy, radio broadcasting policy, employment policy.
Siebke, Jürgen, Prof. Dr, Alfred Weber Institute for Economics and Chair of Economic
Policy II, University of Heidelberg; areas of research: monetary macroeconomics, income
and distribution of wealth and international monetary policy.
Siegmund, Uwe, Dr, investment strategist at R+V Insurance, Wiesbaden.
Sket, Michael, economist, associate Economics lecturer, University of Düsseldorf.
Smeets, Heinz-Dieter, Prof. Dr, head of the Department of Economics, University of
Düsseldorf; areas of research: international economic relations, monetary theory and policy,
and empirical economic research.
Söllner, Fritz, Prof. Dr, head of the Department of Financial Sciences, University of
Ilmenau, consultant for the OECD, Paris and the IMF, Washington; areas of research: ques-
tions of financial constitution and fiscal policy, environmental economics, economic his-
tory, new political economics.
Soltwedel, Rüdiger, Prof. Dr, head of the Department of Spatial Economics, Institute for
World Economics, University of Kiel; areas of research: spatial aspects of European integra-
tion, institutional economic order policy aspects of liberalisation in the field of network
infrastructure.
Starbatty, Joachim, Prof. Dr Dr h. c., Department of Economics, especially Economic Policy
I, University of Tübingen, chairman of the Social Market Economy Action Group ; areas
of research: institutional economic order policy including the transformation of economic
systems, economic history, stabilisation policy, industrial and technological policy, interna-
tional political coordination.
Steger, Ulrich, Prof. Dr, Institute for Ecology and Business Management of the European
Business School, registered association, chairman of the Research Institute for
Environmental Management and Business Management in Oestrich-Winkel, professor
for Environmental Management at the IMD Business School, Switzerland.
Stockmann, Kurt, Dr, former vice-president of the Federal Cartel Office.
Straubhaar, Thomas, Prof. Dr, president of the Hamburg World Economic Archive; areas of
research: international trade relations, European integration, population economics, educa-
tional economics.
Tangermann, Stefan, Prof. Dr, Agricultural director of the OECD in Paris.
Thieme, Hans Jörg, Prof. Dr, Chair of Economics, University of Düsseldorf; areas of research:
monetary and credit theory and economic policy implications, monetary policy implica-
tions of the European Monetary Union, transmission theory and processes of economic
fluctuations, analysis of interest structures and international connectedness of interest
structures, economic systems and transformation processes in eastern and south-eastern
Europe.
Tuchtfeldt, Egon, Prof. Dr Dr h. c. (retired), professor of Economics, University of Bern
(Switzerland); areas of research: general and sectoral economic policy, economic systems
(especially social market economy), competition policy, international trade relations,

European integration, social policy, economic history.
Vaubel, Roland, Prof. Dr, Chair of Economics, University of Mannheim; areas of research:
monetary policy, political economics and social policy.
Veit-Bachmann, Verena, Dr, former assistant of Professor Dr Friedrich A. Lutz.
Wagner, Adolf, Prof. Dr (retired), Institute for Empirical Economic Research, University of
Leipzig, editor of the Yearbook for National Economics and Statistics; areas of research:
empirical economic research, with special emphasis on the policy of economic fluctua-
tions, growth and structure, population policy, evolutionary economics.
Watrin, Christian, Prof. Dr (retired), Institute for Economic Policy, University of Cologne,
member of the Academic Advisory Committee at the Federal Ministry for Economics and
Technology; chairman of the Mont Pèlerin Society, Washington DC; areas of research: eco-
nomic policy, especially institutional economic order policy and economic systems.
Weigelt, Klaus, economist, associate lecturer, Konrad-Adenauer-Stiftung (KAS), former
head of the KAS Academy and of the KAS foreign branches in Brussels and Budapest
(Hungary).
Welsch, Thomas, economist, assistant lecturer at the Institute for Comparative Economic
Systems, University of Marburg.
Wessels, Wolfgang, Prof. Dr, Research Institute for Political Sciences and Europe, University
of Cologne; areas of research: the political system of the European Union, theories on inter-
national relations and European integration, consolidation and enlargement of the EU.
Westerhoff, Horst-Dieter, Prof. Dr, honorary professor, University of Duisburg-Essen,
group leader in the Federal Chancellor’s Office in various functions including statistics.
Wichert, Peter, Dr, former staff member in the Federal Ministry for Finance, Department
Money and Credit, former secretary of state in the Federal Ministry for Defence.
Willgerodt, Hans, Prof. Dr (retired), Institute for Economic Policy, University of Cologne;
areas of research: economic policy, especially institutional economic order policy, theory and
policy of foreign trade.
Winning, Alexandra von, business graduate, associate lecturer at the Wittenberg Centre for
Social Ethics.
Winterberg, Jörg, Prof. Dr, Economics professor, University for Applied Sciences
Braunschweig / Wolfenbüttel; areas of research: monetary integration, future of the welfare
state.
Wogau, Karl von, Dr, member of the European Parliament since 1979, chairman of the sub-
committee for Security and Defence, member of the Foreign Affairs Committee, deputy
member of the Economic and Monetary Committee, Member of the Delegation for
Relations with North Atlantic Treaty Organization; areas of research: European defence,
social market economy in the EU.
Wolburg, Martin, Dr, Research AM Generali Invest, Cologne.
Zimmermann, Horst, Prof. Dr Dr h. c. (retired), professor of Financial Science, University
of Marburg; areas of research: financial aspects of federalism, regional economics, problems
of the welfare state.
Zimmermann, Klaus W., Prof. Dr, Institute for Financial Sciences, University of the Armed
Forces in Hamburg, editor-in-chief of the magazine for environmental policy and envi-
ronmental law; areas of research: environmental policy, political economics, policy analysis,
business policy, economics of defence.
515
Index
Biographies and other personalities
Adenauer, Konrad 33, 70, 72, 178, 402 Kohl, Helmut 380, 383, 405, 458
Althaus, Paul 75 Lampe, Adolf 28, 31
Armand, Louis 62 Liebknecht, Karl 430
Locke, John 304, 448
Beckerath, Erwin von 27-28, 68-69, 393 Lorenz, Max 255
Bentham, Jeremy 304 Lutz, Friedrich A. 47-48
Bergson, Henri 27
Böhm, Franz 28-30, 50-51, 54-57, 60, 64, Machiavelli, Niccolo 27
304, 308, 389, 393, 485 Marshall, George C. 487
Briefs, Goetz 30-31, 297 Meyer, Fritz W. 49-50
Meyerowitz, Esther Sara alias ‘Christa
Croce, Benedetto 32 Koch’ 44
Michels, Robert 27
De Gaulle, Charles 61-62 Miksch, Leonhard 50-51, 393
Dietze, Constantin von 31-32, 393 Mill, John Stuart 241, 448
Mises, Ludwig von 304
Einaudi, Luigi 32-33 Müller-Armack, Alfred 50, 52-54, 57, 64,
Engel, Ernst 83 70, 101, 230, 297, 304, 389, 391, 393,
Engels, Friedrich 100, 429 394, 399, 407, 416-418, 432, 461-462,
Engels, Wolfram 33-34 482
Erhard, Ludwig 28, 33-36, 39, 41, 50-51,
53-54, 60, 64, 66, 70-71, 77, 230, 304, Nell-Breuning, Oswald von 44, 53-57
339, 344 Nipperdey, Hans Carl 57-58
Eucken, Walter 28-29, 31-32, 36-39, 41-
44, 46-51, 60, 64, 66, 70, 76, 101, 121, Pope John Paul II 101
174, 230, 277, 297, 304, 344, 393, 399, Pope Leo XIII 100
431, 485 Pareto, Vilfredo 27
Popper, Karl R. 125, 305
Fourier, Charles 429 Preiser, Erich 28
Frickhöffer, Wolfgang 39-40
Rawls, John 305
Hayek, Friedrich A. von 40-41, 122, 124, Ricardo, David 241
126, 304, 307 Röpke, Wilhelm 32, 41, 58, 59-60, 64, 70,
Hensel, K. Paul 42-43 304, 389, 391, 393, 402, 406
Höffner, Joseph Kardinal 43-45 Rueff, Jacques 33, 60-63
Hume, David 41, 122, 304 Rüstow, Alexander 39-40, 63-65, 74-76,
304, 391, 393
Jessen, Jens 27
Salin, Edgar 28
Kamitz, Reinhard 33, 45, 46 Sax, Emil 27
Karrenberg, Friedrich 47 Schiller, Karl 40, 65-66, 403-404
Keynes, John Maynard 27, 31, 126, 293- Schleyer, Hanns-Martin 67
294, 402 Schmölders, Günter 67-68
516 Index
Schmoller, Gustav von 27, 120 Thielicke, Helmut 74-75, 398

Schreiber, Wilfried 68-69
Schumpeter, Joseph Alois 31, 162 Veit, Otto 75-76
Smith, Adam 41, 55, 100, 122-124, 141,
241, 304, 307, 318, 410-411, 446 Weber, Alfred 39
Sombart, Werner 432, 482 Weber, Max 27, 52, 304, 482
Sorel, Georges 27 Welter, Erich 77
Spiethoff, Arthur 432
Stoltenberg, Gerhard 70-72 Yoshida, Shigeru 33
Stützel, Wolfgang 34, 72-73
Index 517
Themes
A B
Accident insurance 79, 324, 488 Baker Plan 259

Accountancy, business 93, 171, 351 Balance of payments 49, 62, 86, 156, 239-
Achievement principle 80, 139, 141, 392, 240, 279-280, 476, 487
412, 425, 408 Balance of payments equilibrium 48, 85-
Act Against Restraints of Competition 29, 86, 114, 128, 156, 288, 412, 441
35, 81, 82, 83, 115, 227, 229, 436 Balancing, social 102, 145, 257, 358, 390,
Act to Promote Economic Stability and 394, 403, 407, 415, 417, 423, 432
Growth 66, 85, 155, 294, 344 Bancassurance 445, 478
Adjustment process 136, 231, 274, 414- Banking system 73, 76, 86-89, 172, 478
413, 475 Basel II 89, 478
Administrative efficiency 452 Basic Law 57-58, 89-90, 103, 109-110, 158,
Age quotient (AQ) 133-134 165, 170, 232-234, 236, 237-238, 314-
Agenda 2000 185, 189-190, 215, 477 315, 323, 337, 355-357, 362, 367, 379,
Agglomeration 56, 286, 477 396, 398, 401, 408, 418, 424, 427, 433,
Agriculture 88, 90, 106, 184, 186, 202, 228 436
237, 264-265, 271-272, 330, 349 Basic rights 89, 215, 424
Agricultural commodity market 83-84 Basic social security 90-92, 421, 473
Agricultural market 224 Benchmark 285, 396, 478
Agricultural policy 83-85, 183-184, 189, Beveridge curve 155
208, 214-215, 272, 421, 484 Birth rate 69, 131-133, 251, 286, 471
Agricultural produce price 183-184 Bizone 401, 479
Air pollution control 164, 170 Blue List institutions 373, 479
Alliance for Employment 116-118, 157, Bonhoeffer Circle 31
159, 419 Bracero Programme 283, 479
Allocation 83, 91, 102, 121, 135, 172, 181, Brady Plan 259
182, 186-187, 207, 213, 230-231, 234- Brain drain 285, 479
236, 238, 243, 251-253, 261, 265, 277, Bretton Woods institutions/system 48, 62,
344-345, 366, 370, 377, 407, 409, 477, 130, 279, 287-288, 404
478, 490, Business 29-30, 33, 76, 79-81, 87-88, 93-
Allocation function 98, 344, 413, 477 94, 105-106, 111-112, 119, 135-136,
Annual report 86, 94, 128-129, 211, 351 159-163, 166, 169, 171-172, 191, 214,
Annuity 376, 477 246, 262, 264, 266, 271, 282, 308, 316,
Arbitrage 285, 435, 477 327, 331, 351-352, 357, 365, 373, 420,
ARC, see Act Against Restraints of 438, 445-446, 453, 457, 459, 464, 471
Competition Business accountancy 93, 171, 240, 351, 384
Assistance, public see also Subsidies 73, 79, Business cycles 36, 95-97, 107, 180, 240,
84, 91-93, 138, 219-220, 248-250, 253, 295, 321, 395, 404, 464-465, 481, 491
264-265, 277, 280, 300-301, 329, 331, Business cycle policy 52, 96-98, 107, 117,
342, 345, 373, 385-387, 412, 422, 424, 157, 294
426, 428, 434, 440-441, 443, 457, 468-
469, 483
Association for social policy 27-28, 31 C
Autonomy 39, 45, 55-56, 73, 102-103, 109,
143, 147-148, 158-159, 186, 221, 234, Candidate countries 198-199
261, 263-264, 330, 406, 418-419, 421, Capital 46, 55, 80-81, 86-87, 89, 94-95, 98-
428, 452, 454 100, 106-109, 112, 136, 138-139, 155,
518 Index
158, 161, 190-191, 200, 220, 222, 226, 299, 301, 324, 332, 375, 376, 386, 392,
240-241, 243, 245, 254, 305, 312, 319, 414, 423, 428, 457, 475-476
326, 344-345, 349, 350, 354, 356, 367, Competition 29, 34, 38, 41, 46, 51, 54, 58,
369, 382, 389, 402, 407, 409, 420, 427, 64, 71, 74, 80-81, 87, 90, 102, 111-115,
449, 473-475, 485 121, 127, 136, 145, 148, 156, 159, 162,
Capital equipment 136, 150, 239, 254 177, 185, 190-191, 194, 197, 200, 207,
Capital flow(s) 243, 245, 279-280, 290 213, 222, 224, 237, 243, 267, 270, 274,
Capital formation 138, 244, 253, 402, 473 277, 291, 300, 307, 312, 316, 323, 330,
Capital goods 294, 350 333, 338, 354, 357, 384, 399, 409, 446,
Capital markets 59, 71, 88, 98, 100, 150, 449, 456, 461, 465, 473-474
160, 163, 176, 192, 197, 316, 348, 361, Competition failure 135, 273
475, 479, 488 Competition law 29, 57, 228 315, 401, 408,
Capital mobility/movement 130, 242, 274, 414
279-280, 490 Competitive system 37, 38, 50, 51, 265,
Capital stock 355, 389 291, 327, 344
Capital transaction 239-240, 279-280, 480- Compulsory disclosure 445, 480
481, 490 Concentration 37, 88, 114-116, 137, 165,
Case law 295-296 206, 219, 229, 257, 286, 310, 315, 357,
Casuistic 480 358, 422
Catholic social doctrines 54, 56, 68, 100, Concept of man 389, 391, 395-398
310, 417 Concerted action 116-118, 163, 204, 404,
Centrally administered/controlled/managed 419
economy 36-38, 41-43, 52, 55, 58, 80, Conditionality 138
125, 144, 257, 309, 393, 399, 429, 454, Conflicting aims 118-120, 156, 173, 333,
460-461 338, 493
Centrally planned economy 125, 144-145, Conflicting aims, in economic policy 118,
306 173, 180, 335, 338, 345, 395, 418, 460
Chamber of Commerce and Industry 67, Conflicting aims, in environmental policy
103-105 167, 379
Chamber system 103, Conservatism 120-122
Chambers 103-106, 330, 364 Constitutional economics 267, 269
Circular flow of incomes 95, 106-107, 367, Constructivism 37, 121-126, 404, 455, 481
385, 485 Consumer 32, 77, 81, 83, 92, 101, 106,
Climate protection 166, 170 112-113, 119, 126-128, 131, 136, 154,
Co-determination 30, 33, 68, 107-109, 162, 179, 191, 207, 214, 223-224, 240-
135, 160, 165, 299-300, 387, 418-419, 242, 253, 294, 307-308, 310, 312-313,
421, 427, 441, 463 328-329, 346, 348, 355-356, 377, 382,
Collective agreements 109-111, 118, 157- 401, 405, 409-410, 415, 427, 443, 445-
158, 262-263, 266, 295-296, 298-299, 448, 465, 475, 477, 481-482, 491, 493
300, 323, 383, 406, 463, 466, 472 Consumer demand 122, 154, 294
Collective principle 454-455 Consumer goods 106, 228, 240, 294, 312,
Collective property 354, 460 349, 445, 491
Commercial conflicts 85, 184 Consumer policy 126, 128
Common agricultural policy (CAP) 184, Consumer sovereignty 127, 307, 430
187 Consumption-savings method 106-107
Communication/communication technolo- Convergence 176-177, 221, 339, 374, 480
gy 223, 236, 243, 277, 298, 313, 315, Convertibility 61-62, 175, 279, 480
320, 399 Corporations 67, 73, 103-104, 108, 117,
Compensation 79, 83, 89-90, 127, 149, 160-162, 203, 241, 243, 276, 289, 339,
154, 226, 231, 234, 235, 237, 260, 275, 351, 356, 433, 480, 486
Index 519
Corruption 141, 293, 308, 462, 292 Disparity 123, 481

Costs 91, 94-95, 98, 107, 112, 116, 120, Distribution 55-56, 71, 81, 88, 101, 112,
135, 141, 148-149, 150-152, 156, 158- 114, 127, 134, 137, 139, 140-141, 165,
160, 166, 167, 169-170, 172, 187, 195, 173, 180-181, 186, 190, 216, 232, 235-
200-201, 204, 207, 214, 223, 225, 232, 236, 252, 253-255, 257, 271, 278, 285,
236, 240, 242, 248, 291, 318, 322, 328- 298, 313, 315, 328, 332, 340-341, 344,
329, 341, 346, 351, 364-366, 368, 370, 345, 349, 357, 366, 368, 391, 395, 410-
372, 383, 384, 386, 413, 428, 435, 441, 411, 414, 422, 424, 427, 429, 433, 474-
447, 451, 453, 457, 462, 472, 475, 478, 475, 477-478, 481, 487
482, 484, 489, 493 Distribution target 137
Council of Experts 34, 50, 73, 128-129, Dividends 98-99, 351, 352
302 Domino effect 89
Credit 73, 86, 88, 89, 98, 351, 361-362,
445, 473, 478, 491
Crisis 32, 48, 53, 60-63, 88-89, 123, 258, E
280, 287, 298, 340, 404, 470
Currency system and exchange rate Eastern European states 197-198, 382
regimes 129, 156, 278, 287, 404, 436, Economic agent(s) 64, 98, 102, 106, 139,
484 140, 207, 236, 254-255, 265, 269, 271-
Currency snake 130, 202, 481 272, 293-294, 300, 306, 311, 328-329,
Customer 81, 87, 93, 112, 272-273, 308, 335, 345, 357, 387, 390, 409-415, 421,
313, 329, 352, 445, 453, 463 441, 443-444, 448, 451, 477, 481, 483,
Cycle analysis 106 487-490
Cyclical unemployment 97 Economic constitution 57-58, 144, 176,
291, 389, 414-415, 449
Economic cycle(s) 95, 404
D Economic ethics 44, 141-143
Economic fluctuations 95, 114, 481
Debt 91, 258-259, 348, 361-362, 369, 376, Economic history 30, 269, 399, 436
404, 433 Economic order 27, 31-32, 37, 38, 43, 55,
Debt cancellation 259 64, 70, 96, 123, 143-145, 270-271, 304,
Decentralisation 116, 122, 201, 354 306, 380-381, 393, 395, 407, 420, 432,
Deflation 61-62, 173, 317, 319, 481 485
Degree of openness 241, 481 Economic order, theory and implementa-
Demand 61, 83-84, 86, 93, 96-97, 120, tion 143
151, 153-154, 156-157, 158, 184, 191, Economic planning 124, 125, 305-306, 429
200, 213, 225, 231, 239, 250-252, 268, Economic policy, conflicting aims 118,
269, 285, 293-294, 298, 299, 307, 310- 173, 180, 335, 338, 345, 395, 418, 460
314, 317, 326, 328, 345, 348, 357-358, Economic rent 482
362, 366, 368-369, 377, 409, 446-447, Economic stabilisation 53, 56, 96-97, 208
449, 465, 471, 486 Economic Stability and Growth Act, see Act
Demand management 395, 404, 481 to Promote Economic Stability and
Demographic development 131, 134, 327, Growth
406 Economic style 52, 394, 432, 482
Deregulation 62, 135-137, 163, 224, 252, Economic supervision 444
273, 316, 324, 347, 404, 414, 458, 462 Economic system 28, 34, 37, 41, 51, 55,
Developed countries/nations 137-138, 58-60, 74-75, 80, 89, 100-101, 109, 270-
244-245, 297, 475 271, 287, 291, 298, 304, 337, 343, 357-
Development aid, development policy 358, 390, 394, 399, 400-401, 410, 430-
137-138, 258, 288 431, 432, 448-449, 455, 485
520 Index
Economic union 174-175, 177, 275, 380, Entrepreneur 47, 113, 146, 161-163, 169,
383 260, 273, 349, 460
Education 90, 103, 105, 126, 137-138, 146, Environmental goods 168, 377-379
148, 149, 151, 160, 162, 167, 192-194, Environmental impact 163, 166, 379, 457
207, 219, 226, 246, 282, 286, 331, 340- Environmental policy 105, 164-166, 169-
341, 356, 371, 393, 397, 422-423, 471, 171, 201, 379, 414, 484
480 Environmental policy, actors 165, 379
Education and research policy 146, 426, Environmental policy, conflicting aims
472 167, 379
Education and research policy, in the EU Environmental policy, instruments 167-
192 170, 484
Education funding 127, 148, 194, 472 Environmental pollution 141, 170, 201
Efficiency gains 347, 348, 475 Environmental problem 166
Efficiency principle 139-140 Environmental protection objectives 169,
EFTA, see European Free Trade Area 483 172, 293, 448
Egalitarianism 429, 482 Environment-oriented management 171,
Emission 98, 165, 168-172, 188, 201, 377- 200, 413
378, 444, 448 Equal treatment 220, 422
Empirical evidence 476, 482 Equalisation 86, 213, 240, 280, 330, 375,
Empirical method/research 68, 466, 470, 455
483 Equity 93-94, 99, 353, 478
Employment 85, 90-93, 110, 114, 128, Equivalence principle see Principle of
136, 153-156, 158-159, 162-163, 173, equivalence
180, 195, 196, 200, 205, 222-223, 227, ERP special assets 330, 373, 483, 487
230, 240, 254, 265, 271, 278, 281, 282, Euroisation 483
285, 294, 297, 300-303, 317, 324-325, European Central Bank 35, 46, 172, 174-
344, 366, 373, 386, 400, 402-403, 406, 176, 178-179, 183, 197, 208-209, 319,
412, 422, 441, 464-466, 468-470, 475 343, 346, 369, 399
Employment agency 229, 231 European Economic and Monetary Union
Employment policy 157-159, 221, 231, 46, 61, 174, 176, 193, 196, 203, 213, 384,
469 399, 414, 490
Employment policy assignment 158 European Free Trade Area 483
Employment Promotion Act 230-231, 324, European monetary policy 173, 177, 207,
467 319
Employment protection 421 European monetary policy, actors 178-180
Employment protection laws/legislation European monetary policy, aims and duties
226 179
Endogenous 156, 483 European monetary policy, instruments
Engel’s Law 83 173, 180
Enterprises 41, 79-82, 87-88, 98-99, 104- European monetary policy, strategies 182
109, 113-115, 118, 125, 128, 141, 143, European monetary system 61, 71, 130,
145-146, 148-149, 151, 154, 158-163, 175, 279, 319, 484
166-167, 171, 191-192, 195-196, 200, European Parliament 178, 187-189, 196,
204, 207-208, 213, 225, 249, 254, 265, 198-199, 202, 207-210, 224, 399
266, 274-275, 280, 291, 293, 306, 311- European Union 90, 105, 165, 169, 185,
312, 320, 329, 339, 349, 350-353, 360- 217, 233, 235, 275, 284, 290, 296, 309,
361, 363-364, 372, 375-376, 380, 384, 330, 340, 365, 383, 442,
406, 410, 425, 430, 435, 442-443, 449, European Union Treaty 187, 198, 203,
458-460, 464, 471, 477-478, 480, 482, 207, 215, 222, 400, 480
484-486, 488-489, 491-492, 493 Euro system 172-173, 179-183
Index 521
EU, agricultural policy 85, 183-185, 207, Federal Financial Supervisory Authority
223 89, 445
EU, budgeting 185-186, 189, 368 Federal government/Federal Republic 28-
EU, competition policy 83, 190, 29, 32, 43, 45, 50, 66, 68-70, 72, 75, 77,
EU, education and research policy 192 83, 85-86, 96, 105, 109, 116-117, 121,
EU, employment policy 194, 196-197 128-129, 147, 156, 159-160, 165, 172,
EU, enlargement 177, 185, 190, 197-200, 177, 226, 229, 232, 233-235, 251, 319,
211, 214, 219, 225 330, 361-362, 365, 368, 371, 373-376,
EU, environmental policy 200-201 380-386, 401, 411, 433, 442, 459, 467,
EU, history 202-203 479, 485, 492
EU, industrial, research and technology Federal Law on Education and Training
policy 203-206, 219, Promotion 149-152, 388
EU, maxims for action 206-208 Federal states see States, federal
EU, organs and institutions 208-211, 399 Federal Statistical Office (FSO) 437-438
EU, reforms and consolidation, economic Federal supervisory offices 444
aspects 211-214 Fertility 131-132
EU, reforms and consolidation, political Financial assistance 250, 277, 280, 373,
aspects 214-217 434, 443
EU, regional and structural policy 213, Financial equalisation 186, 218, 235, 238,
217-220, 440 376, 469,
EU, social market economy see Social mar- Fiscal federalism 97, 166, 235-238, 331,
ket economy in the EU 368, 406, 469,
EU social policy 220-222, Fiscal policy 66, 71, 156-157, 215, 288,
EU trade policy 207, 222-224 294-295, 321, 481
EU transport policy 224-226, 458 Five wise men 129
Evolution 121, 124, 431, 484 Fixed (exchange rate) 73, 129-130, 174,
Exchange rate 40, 61-62, 89, 130, 156, 174, 279-280, 287, 345, 484,
176-177, 279, 288, 381, 384, 481, 493 Flexible (exchange rate) 48, 73, 86, 129-
Exclusion principle 127, 329 130, 156, 279, 481
Exemptions 81, 135, 225, 271-274, 442 Floating (exchange rate) 40, 130
Exemptions from competition rules 271- Food 83-84, 127, 142, 168, 171, 322, 340,
274 442, 444,
External effects/costs 135, 293, 378-379, Foreign trade 35, 59, 67, 86, 106, 238-241,
408, 413, 441, 453, 457, 484, 492 357, 377, 402, 404, 408, 414, 481, 484
Foreign trade policy 240
Foreign trade theory 240, 241
F Free trade 27, 90, 174, 207, 240-241, 275,
285, 287, 290, 358, 475-476, 483, 485, 490
Facility 173, 182, 484 Freedom of domicile 199, 485
Factors of production 42, 107, 112-113, Freedom of establishment 191, 485
136, 213, 240, 245, 254-255, 274-275, Freedom of movement 89, 176, 191, 194,
286, 305-306, 312, 344, 347, 349-350, 213-214, 222, 275, 284, 393,
367, 407, 409-410, 447, 449, 451, 463, Freiburg Ordo Circle/School 29, 31, 42,
477, 484 44, 48-51, 60, 75, 304, 344, 393, 485
Family policy 226-227, 253, 422, 425 Full employment 90, 156, 162, 205, 274,
Fascism, fascist 27, 32-33 294, 402-403, 425, 465, 468, 493
Federal Cartel Office (FCO) 29, 82, 115, Fully-funded 325-326
137, 227-229 Further education 105, 148-151, 193, 470,
Federal Employment Agency (FEA) 229-
231, 299, 301, 472
522 Index
G Hypertrophy 486
Hysteresis theory 154, 156
General Agreement on Tariffs and Trade
(GATT) 46, 185, 222, 242, 275, 288-
289, 476 I
German Federal Bank 39, 76, 89, 172-174,
319, 346, 369, 380, 404, 436 Immigration 134, 283, 285-286, 326, 342,
Globalisation 88, 102, 109, 136, 160, 162, 479
167, 192, 241-245, 273, 280, 284, 286, Income 32, 59, 62, 69, 71, 80, 83-85, 90-
290, 315, 321, 355, 398-299, 405, 409, 92, 106-108, 134, 137, 139-142, 149-
456, 462, 475-476 150, 156, 180, 185, 188, 201, 217-219,
Godesberg Programme 55, 66, 339, 403, 222-223, 226, 230-231, 238, 240, 243,
430 245, 248-250, 252, 254-257, 260, 265,
Gold dollar standard 62 285, 293, 301, 312-315, 340-344, 349,
Gold standard 27, 48, 61-62, 130, 287 354-355, 361, 366, 368-369, 371, 374,
Goods production 94, 157, 349-350 381, 385, 400, 410-413, 420, 423-427,
Governance cost theory 267-268 433, 435, 451-455, 456, 461, 474-476
Government ratio see State ratio Income distribution 56, 81, 112, 114,
Gross domestic product (GDP) 86, 95, 139, 140, 254-256, 271, 366, 411, 474-
107, 155, 205, 244, 362, 374, 387, 218, 475
485, 491 Income tax 129, 140, 152, 254, 368, 370,
Gross national income (GNI) 95-96, 107 433, 473,
Gross national product (GNP) 95, 107, Indebtedness 177, 257-259, 363
147, 187-189, 198 Individual responsibility 32, 38, 63, 163,
Growth 62, 70, 85, 95-97, 115, 132, 135- 260-261, 327, 357-358, 403, 412, 427,
137, 139, 155, 157, 162, 173, 177, 200, 473
213, 231, 241, 243, 245-246, 264-265, Industrial accidents 79
280, 285, 317, 320-321, 344, 362, 366, Industrial action 58, 108, 110-111, 261-
392, 400, 403, 433, 467, 474, 491 263, 295, 298, 421, 463,
Growth target 137 Industrial policy 203, 204, 246, 263-265
Industrial relations 54, 108, 418, 463
Industrial relations constitution 221, 266-
H 268, 419, 421, 422, 425,
Industrialisation 251, 297, 331, 340, 359,
Health insurance 116, 129, 207, 226, 247- 469
249, 299, 321, 331, 387, 406, 422, 473, Information 41, 83, 98, 105, 116, 127, 135,
488 146, 193, 205, 223, 230, 242, 266-268,
Heavily Indebted Poor Countries (HIPC) 299, 305-307, 311, 320-321, 332, 336-
258-259 338, 349-352, 355, 379, 410, 413, 418,
Historical school 47, 267, 485 421, 429-430, 436-438, 469, 480, 483,
Housing policy 249-253, 421, 423 486, 488-489, 493
Housing policy: New states 249-251 Information society 205, 223, 405
Housing policy: Old states 251-254 Information (and communication)
Human capital 148, 150, 218-219, 240, technology 100, 161, 268, 298, 320
246, 284, 297-298, 320, 323, 356, 407, Initiative 28, 39, 53, 59, 61, 62, 67, 72, 91,
421, 422, 470, 473, 480 145, 162, 168, 171, 175, 195, 206, 224,
Human dignity 43, 57, 59, 73, 323, 340, 259, 285, 345, 399, 403, 409, 415, 425,
356, 394, 396-398, 408, 411, 422, 425 437, 439, 461, 483,
Human rights 38, 59, 198, 203, 281, 285, Innovation 73, 112, 160, 162-163, 172,
288, 356-357, 396, 427, 430 191, 197, 204-205, 221, 223, 245, 269,
Index 523
271, 273-274, 299, 332-333, 346, 405, 246, 250, 255, 264, 268-269, 272, 280,
409, 430, 447, 451, 455, 475, 486 291, 294, 325, 326, 344, 350, 354-355,
Innovator 113, 162, 269, 486 362, 366-368, 373, 376, 390, 400, 402,
Insider trading 445, 486 410, 413, 418, 435, 439, 440, 448-450,
Insider-outsider theory 154 452, 459, 474-475, 481
Insolvency 257-258, 301, 486 Invisible hand 124, 307, 410, 446
Institutional economics 68, 267-269, 311, Irenics, social see Social irenics
389, 430, 432, 451, 486 Issue 98
Institutional order 270, 272, 308, 387, 389, Issuing bank 76, 346, 436
391, 398, 399, 401, 407, 412, 415, 420,
426-427, 431, 432, 436, 480, 485
Institutional order of economy 415, 419, J
486, 489
Institutional order policy/theory 34, 36-40, Job creation 91, 153, 231, 386
42, 48, 49-52, 55, 64, 66, 70, 71, 73, 77, Job creation measures 301-304, 434
96, 120, 128, 139, 145, 205, 207, 270- Job market 62, 91, 103, 118, 126, 135, 139,
274, 306, 337, 380, 395, 408, 414, 418, 146, 153-154, 157-158, 229, 230, 285-
425, 431, 480 286, 298, 302-303, 345, 421, 465, 466,
Integration 32-33, 35, 46, 88, 90, 103, 163, 468, 475
172-175, 177, 184, 186-187, 190, 200-
203, 206, 210, 214, 217, 220, 223, 230,
240, 245, 273, 274-276, 280, 286-287, K
290, 301-303, 328, 399, 405, 414, 468,
482, 484 Keynesianism 128, 293-265, 395, 402
Integration process 201-202, 217, 302
Interest groups 37, 90, 116-117, 129, 166,
276-278, 290, 291, 317, 329, 331, 336- L
338, 420, 438, 460, 463
International currency systems 48, 278- Labour 43, 49, 57, 101, 108-109, 111, 120,
280, 287, 436 124, 134, 136, 139, 144, 151, 153-154,
International Labour Organization 280- 157-158, 174, 213, 221-222, 226, 229-
283, 290, 296, 419 230, 240, 261, 262-263, 270, 280-283,
International migration 131, 241, 245, 283- 286, 291, 293, 298, 305-306, 318, 344,
287, 451 349-350, 354, 390, 407, 414, 419, 425,
International Monetary Fund (IMF) 46, 427, 468-470, 484, 488, 490
138, 257, 258-259, 280, 288, 480 Labour court 58, 111, 263, 295, 323
International organisations 85, 138, 222, Labour law 57, 295-297, 421, 463, 408
245, 280, 287-290, 390, 476 Labour market 33, 39, 102, 129, 136, 140,
Interventionism 37, 49, 63, 77, 83, 89, 97, 153, 154-156, 160, 175, 177, 180, 196,
121, 125, 264, 270, 271-272, 290-293, 213, 230-231, 241, 286, 294, 297-300,
304, 309, 367, 395, 429, 440, 456, 461 324, 358, 402, 406, 464-465, 467, 471-
Interventions 29, 37, 56, 70, 90, 97, 107, 472
127, 130, 145, 194, 235, 251, 264-265, Labour market order 145, 159, 230, 297-
270-273, 276, 279, 281, 291, 294, 297, 300, 406, 425
302, 304, 309, 333, 358, 365, 367, 369, Labour market policy 157, 195, 230-231,
388, 412-414, 436, 439, 444, 456, 460, 300-303, 421-422, 434, 472
476, 480, 484-485 Labour relations 108, 419, 420
Investment(s) 46, 59, 71, 86-88, 93, 95, 98, Lag 97, 180, 345, 353, 486
100, 136, 148-150, 158, 171, 173, 180, Laissez-faire 36, 38, 41, 51, 59, 75, 97, 487
187, 192, 195, 201, 218, 226, 244, 245, Land 42, 107, 112, 184, 214, 251, 253-254,
524 Index
305, 349-350, 354, 367, 368, 407, 451, 306-307, 316, 354, 357, 360, 378, 389,
458-459, 484, 489 391-393, 404, 411, 414, 432, 456, 460-
Länder see States, federal 461, 462, 473, 485
Law of demand 446-447 Market economy and public institutions,
Liability 38, 79, 87, 161, 168-169, 247, 327, 308-309
377, 462 Market entry 38, 62, 135, 272, 291, 312-
Liberalism 29, 43, 45, 59, 63-64, 75, 97, 313, 327-329, 333, 357
100, 102, 120, 293, 303-304, 310, 359, Market exit 291 327-329
389, 394, 411, 417, 487 Market failure 273, 297, 379, 413, 421
Liquidity 89, 93, 100, 173, 179, 181, 182, Market mechanism 101, 272, 310-312,
294, 361, 377, 486 334, 336, 389, 409, 431
Liquidity theory 76 Markets and prices 144, 306, 312-313, 357
Liquidity trap 294 Marshall Plan 395, 483, 487
Lobby see also Interest groups.. 105, 276- Marxism / Marxist 455
278, 316 Mass privatisation 460
Location competition 162, 166, 200, 423, Materialism 429, 487
449, 452 Maximum load theory 73
Lockout 110, 262, 298 Media policy 313-315
Long-term unemployment 117, 135, 154, Membership candidates 187, 198
301-302, 466, 469 Mennonite 127, 487
Lorenz curve 255 Mercantilism (ist) 421, 482, 487
Loyalty 59, 177, 462 Methodological individualism (ist) 451,
488
Microeconomics/microeconomy 72, 284,
M 295, 297, 488
Middle class policy 316-317, 422, 442
Maastricht, Treaty of 46, 177, 193, 203, Migration 157, 213, 241, 245, 251, 283-
207, 213, 214, 221, 222, 296, 319, 320, 285, 340
345, 362, 400, 482 Migration balance 131
Macroeconomics/macroeconomy 27, 43, Minimum wage 111, 117, 154, 159, 281
72f, 85, 95-98, 107, 128, 133, 135, 138, Mixed economy 454
155, 167, 197, 223, 230-231, 243, 254, Mobility 193, 204, 206, 230-231, 236, 245,
273, 287-288, 293, 302, 319, 331, 345, 274, 284, 286, 293, 299, 300, 407, 451,
349, 357, 362, 366-367, 385, 409, 411, 456-457, 465, 475
435, 438, 444, 456, 481, 487 Monetarism 97, 295, 317-318, 339
Magic square 35, 97, 155-156, 412 Monetary order system 48, 56, 58, 61, 62,
Management 46, 54, 100, 161, 221, 282, 130, 232, 287, 318-320, 408
299, 358, 364, 418-419, 489 Monetary policy 36, 61-63, 75-76, 85, 97,
Management, environmental 171, 172 156, 172-176, 178-180, 182-183, 208,
Manager 108, 161-162, 281, 489 280, 288, 294, 317-318, 344, 346, 380,
Managing and planning 305-306 486
Margin tariff 225, 487 Monetary union 156, 174-176, 198, 275,
Marginal utility 27 287, 346, 380, 383-384, 399
Market access 207, 223-225, 275 Money market (securities/papers) 98, 180,
Market barriers 327-329 182-183, 488
Market behaviour 191 Money supply 97, 118, 130, 172, 178, 183,
Market conformity 64, 358, 395, 487 297-298, 317-319, 382, 384
Market economy 32, 35, 40, 47, 51-53, 63- Monopoly 30, 51, 115, 136, 159, 231, 269,
64, 67, 90, 101, 112, 114, 128, 144-143, 271, 312, 316, 332, 400, 413, 430, 454,
169, 177, 260, 264, 270, 294, 297, 304, 456
Index 525
Mont Pèlerin Society 40, 42, 68, 488 P

Moral hazard 230, 301, 372, 488
Municipalities 71, 103,116, 121 147, 160, Paradigm 55, 404, 423, 489
226, 232, 365, 371, 373, 375, 442 Parastatals 232, 329-331, 347, 364, 411,
Municipal factor 271, 489 422, 459
Partners 38, 73, 80, 86, 108, 133, 156, 161,
185, 221, 222, 261, 268, 301, 308, 345,
N 372, 418, 420, 474, 493
Partnerships 108, 206, 351, 429
National income 59, 95, 106-107, 254-255, Patents/patent system 144, 228, 260, 328,
293 331-333, 356, 484
National product 95, 102, 106-107, 254, Pay-as-you-go 134, 325-327, 474
285, 385, 409, 412, 465, 485 Pension 68-69, 87, 91, 129, 134, 149, 226,
National property 429 299, 325-326, 330-334, 354, 433, 490
National socialism (ist) 27, 31, 44, 48, 50, Pension insurance 134, 149, 152, 207, 232,
60, 76, 229, 287, 393, 396, 422 247, 322, 333-334, 370, 387, 422, 490
Natural rate of unemployment 154 Pension system 134, 325
Nature conservation 166, 170 Phillips Curve 155, 344-345, 493
Neo-liberal (ism) 33, 40, 53-54, 56, 64-65, Planned economy 112, 125, 144-145, 306,
122, 304-305, 310, 389 402, 406, 429
Net borrowings 70, 361-362 Planning 45, 122, 124-125, 144, 225-226,
Net income 140, 352 237, 250, 265-266, 271-272, 305-306,
Net purchasing power 285 358, 402, 429, 430, 475, 485
Net reproduction rate 132 Planning authority, public 430
New economy 160, 320-321, 356 Policy consulting 334-336
Nobel Prize 40, 42 Political parties 121-122, 277, 291, 315,
NRR, see Net reproduction rate 331, 337-339, 347, 461
NRU, see Natural rate of unemployment Polluter pays principle 201, 489
Nursing care insurance 221, 298, 321-323, Polypoly 113, 312, 446
330, 386, 388, 421, 474 Population development 131
Population growth 131
Portfolio 99, 279-280, 284, 326, 435, 489
O Poverty 91-91, 137, 141, 259, 325, 340-
343, 424
Obstacles (barriers) to trade 186, 288, 490 Poverty reduction 258, 282, 288, 476
Occupational health and safety 271, 281- Price formation 99, 129, 225, 306, 393,
282, 295, 323-325, 421 408, 441, 446
Okun’s Law 155 Price level stability 35, 48, 85, 114, 128,
Old-age pension 69, 100, 126, 134, 226, 155, 156, 173, 180, 183, 219, 280, 318,
325-327, 333-334, 473 320, 327, 338, 343-346, 400, 412, 427,
Oligopoly 113, 312 441, 487
Open market (market entry, market exit) Price stability 173, 177, 179-180, 343-343,
38 113, 135, 260, 272, 274, 291, 312, 346, 400
327-329, 333, 358 Price, balancing and signal effect 447
Opportunity cost 95, 407, 409 Principal-agent theory 268, 489
Ordnungspolitik/theorie see Institutional Principle of equivalence 369, 455, 490
order policy/theory Private property 32, 38, 56, 89, 142, 145,
Ordo-liberalism 45, 50, 267 265, 270, 298, 304, 327, 354-356, 368,
Output method 106-107 391, 393, 399, 401, 408, 410-411, 415,
Own capital funds 89, 99, 375 439, 454
526 Index
Private residential property 250, 252-254, Protestant 31-32, 47, 70, 74, 360, 487
473, 474 Protestant social ethics 310, 358-361, 417,
Privatisation 72, 163, 249, 316, 331, 347- 420
348, 365, 369, 371-372, 375-377, 383, Public administration 60, 103, 308, 347
404, 414, 458-460 Public choice school/theory 68, 267, 269,
Privatisation agency see Treuhand 451, 490
Privitisation Agency Public debt 243, 361-363, 367, 369, 377,
Process policy 37, 96, 176, 207, 264, 270- 403
271, 306, 414, 431, 408 Public enterprises 99, 135, 160, 273, 316,
Production 42, 61, 94, 96, 101, 107, 112- 330, 331, 347, 361, 363-365, 369, 440,
113, 126, 131, 135, 157, 159, 173, 186- 444, 486
188, 200, 213, 224, 240-245, 254-255, Public expenditure 62, 70, 233, 235, 273,
267, 272-273, 291, 305-307, 312, 320- 348, 365-368, 369, 371, 404, 412, 434
321, 327-329, 349-350, 365-366, 377- Public revenue 186, 207, 233, 329, 347,
378, 407, 409-410, 413, 415, 429-430, 367-371, 392, 412, 433
441, 447, 449, 453-454, 463, 474 Public tasks 123, 166, 232
Production costs 158, 160, 167, 365, 368 Public-private partnership 206, 371-373
Production potential 96, 185, 317, 381, 442
Production process(es) 107, 125, 134, 142,
162, 171-172, 240, 242, 254, 263-264, Q
286, 357, 395, 410, 473, 475
Production and supply 113, 254, 349-350, Quality of the environment 168, 170
389 Quadragesimo Anno 31, 54, 101
Profit 98-99, 113, 139, 142, 160, 169, 201,
254, 261, 307, 309, 351-353, 358, 364-
365, 409, 435-436, 474, 487 R
Profit maximisation 55, 87, 98, 113, 139,
142, 169, 201, 254, 261, 307, 309-310, Raiffeisen banks 87
316, 347, 350-352, 358, 364, 404, 409, Rational 42, 55, 311, 328, 336, 359, 415, 490
435-436, 473, 478 Rational choice 141
Proletariat 30, 100, 125 Real income, purchasing power 245, 474-
Property 41, 72, 102, 161, 327, 345, 354- 475, 491
356, 426, 458, 473 Recession 73, 95, 120, 294, 369, 404, 491
Property rights 61 Reconstruction East 373-375, 383, 433-
Property rights theory 61, 267, 269, 356, 434, 459
378, 408, 410-411, 488, 490 Redemption Fund for Inherited Liabilities
Prosperity 34, 69-70, 98, 102, 142, 145, 330, 373, 375-377, 382, 405, 459
173, 213, 222, 269, 274, 280-281, 285, Redistribution 56, 90, 102, 141, 159, 180,
297, 307, 318, 321, 323, 347, 378, 390, 215, 218, 238, 265, 270, 277-278, 338,
391, 405, 407, 411, 414-415, 418, 424, 345, 388, 392, 411-414, 422-423, 426,
427, 456, 461, 463, 465, 473, 475, 476, 443, 473, 488
487 Refinancing 173, 181, 491
Prosperity for all 34, 405, 407, 415, 427, Reform programme 61, 138
461, 463 Refusal to work 110
Prosperity increase 323, 475 Regulatory principle 54-55, 379
Protection against unfair dismissal 73, 154, Rehabilitation 79, 333-334, 374
253, 299-230, 324, 387, 421 Renewable resources 170
Protection of freedoms 356-358 Rent-seeking 277, 372, 414
Protectionism 61, 200, 222-223, 287, 304, Resource protection 170, 247, 377-379,
475-476, 490 412
Index 527
Reunification 66, 132, 375, 393, 395, 405, Social partners 221, 263, 295, 418-419,
433, 420
Reunification, monetary, economic and Social partnership 419-420, 421, 427
social union 380-383, 405, 460 Social plan(ning) 122, 125, 267, 373, 376
Reunification, currency conversion 383- Social policy 34, 38, 64, 69, 101, 105, 220-
384 223, 230, 265, 271, 296-297, 343, 358,
Revenue neutral 167 387, 390, 398, 420-423, 425
Rights of disposal 332, 356, 441 Social policy, international 423-424
Social quality of a society 426
Social reporting 387
S Social state 56-57, 90, 323, 358, 379, 406,
408, 411, 422, 424-426, 427-428, 436,
Savings deposits 381, 491, 493 461
Scarcity 56, 112, 125, 144, 269, 285, 293, Social Security Code 91-92, 229-301
297, 305, 307, 371, 378, 407-409, 429, Social services 91-92, 321, 341, 386-388,
447 488
Self-help 39, 87, 103, 143, 251, 385, 428, Social system 42-43, 52, 64, 113, 123, 145,
469 163, 207, 243, 261, 307, 344, 358, 391,
Shareholder value 162, 491 406, 408, 411, 417, 423-429, 460
Shareholder(s) 54, 94, 99, 108, 160, 162, Social union 380, 383
268, 351, 356, 480, 489, 491 Socialism 40, 60, 63-64, 100, 145, 287,
Shadow economy 385-386 429-430, 460, 462, 482
Sight deposits 382, 493 Socialism/planned economy 42, 58, 75, 89,
Social assistance see also Basic social security 144, 275, 290, 306, 375, 402, 429-430,
342, 386, 426, 469 454,
Social balancing 102, 145, 357-358, 390- Social market economy 27, 33-34, 39, 47,
391, 394, 403, 407, 415, 417, 432 52, 58, 77, 109, 122, 141, 145, 203, 254,
Social budget 386-389 270, 274, 297, 323, 325, 327, 354, 357,
Social capital 389-390 379, 380, 386, 389, 394, 401-402, 418,
Social compensation 52, 393, 388 426, 432, 472, 485
Social doctrine, Catholic 54, 56, 68, 100, Societal foundations of economic orders
310, 417 389, 391, 431-433
Social ethics, protestant 310, 358-360, 417, Solidarity 44, 59, 102-103, 113, 141, 235,
420 248, 263, 359, 375, 392, 396, 406, 411,
Social irenics 52, 392, 394, 416-417 412, 415, 425, 428, 433, 491
Social justice 54, 60, 69, 72, 101, 145, 281- Solidarity strikes 263
282, 390-392, 394, 398, 421-422, 424, Solidarity surtax 382, 433-434
432, 463 Speculation 382, 435-436
Social market economy, An introduction Stability and Growth Act, see Act to Pro-
393-394 mote Economic Stability and Growth
Social market economy, Concept of man Standard of living 125, 137, 190, 395,
395-398 468
Social market economy, In the EU 398- State ratio 70, 348, 367, 404, 406, 485
401 State under the rule of law 90, 308, 448
Social market economy, Political imple- State federal 71, 82, 85, 87, 92, 116, 121,
mentation 334, 394, 401-407 148, 153, 160, 165, 217, 232-234, 229,
Social market economy, Principles and 235, 238, 249, 251, 315, 330, 361, 365,
functioning 407-416 373-375, 383, 386, 442, 486, 492
Social market economy, Social irenics 416- Statistics 342, 436-439, 465
418 Strike 77, 110-111, 262-263, 401
528 Index
Structural crisis 298 Telecommunications 51, 127, 135-136,

Structural policy 56, 157, 187, 189-190, 272-273, 286, 347-348, 373, 377, 400
215, 264-265, 275, 439-441, 442, 477 Term deposits 317, 489
Subsidiarity 43, 64, 65, 121, 225, 406, 427, Terms of trade 258, 492
492 Third way (s) 37, 52, 59, 145, 430, 454-
Subsidiarity principle 87, 103-104, 120, 456, 458
166, 201, 207, 219, 232, 234, 252, 298, Token strike 111, 263
331, 358, 399-400, 408, 412, 415, 425, Trade union (s) 30, 39, 55, 90, 109-108,
428, 443, 116-117, 129, 158-159, 261-263, 276-
Subsidies 33, 36, 62, 71, 83-85, 104, 107, 277, 296, 298, 300, 311, 316, 329, 331,
176, 184-185, 192, 200, 207-208, 223, 339, 351, 360, 401, 401, 418-419, 421-
225, 241, 251-254, 264-265, 276, 301, 422, 437, 440, 459, 463, 469
303, 327, 329, 331, 341, 345, 348, 366, Trade-off 97, 493
373, 388, 408, 412, 425, 434, 439, 441- Transaction costs 207, 268-269, 308, 318,
443, 452, 457, 459, 472 389, 493
Subsistence level 125, 140, 309, 340, 342- Transfer income 254
343, 420-421, 423-424, 492 Transition countries 460
Substitution 313, 438, 492 Transport policy 224, 456-458
Subsumption 157, 253, 310, 492 Transport services 225, 457
Supervisory board 55, 76, 108, 162, 277, Treuhand Privatisation Agency 373, 458-
459 460
Supervisory offices 89, 443-445 Treuhandanstalt 375-376, 383-384
Supplier 38, 81, 94, 98, 105, 112-113, 119, Trial and error 41, 125, 410
127, 136, 149, 153, 162, 191, 223, 252, Types of market economy 103, 145, 393,
270, 272-273, 293, 316, 345, 358, 361, 460-463, 485
364, 366, 377, 409-410, 413, 415, 443,
445-447, 449, 456-457,478
Supply of (goods, factors of production) U
94, 101, 114, 133, 137, 153, 168, 240,
245, 254, 307, 327, 350, 354, 364, 446- Ultima ratio principle 263
447 Unemployment 38, 59, 73, 93, 95, 116-
Supply and demand 83, 127, 129, 139, 153, 188, 120, 128-129, 134-135, 140-141,
158, 190, 230, 252, 279, 310, 312, 328, 153-155, 180, 195, 197, 217, 221, 230-
409, 445-447, 472 233, 247, 264, 287, 293-294, 297-298,
Surplus supply 154, 471 300-303, 318, 323, 338, 344-345, 358,
Sustainability 121, 170, 412, 448-449 383, 386, 403, 405-406, 412, 414, 421,
Sustainable development 170, 355 423-427, 430, 442, 463-470
Synergy effects 372, 492 Unemployment assistance 469
Systems competition 145, 156, 162, 166, Unemployment benefit 247, 300, 322, 468
243, 321, 401, 423, 449-451 Unemployment insurance 207, 229, 321-
322, 330, 374, 433
Unemployment rate 155, 381, 466
T Unemployment, causes and effects 463-
467
Tax burden 167, 219, 371, 386, 451-452 Unemployment, social security 222, 226,
Tax policy 329, 451-453 299, 467-470
Tax rate 71, 129, 406, 443, 451-453, Unemployment, typology 465
489 United Nations 131, 281, 288-289, 296,
Tax reductions 46, 97, 294, 404, 412, 433 448, 467
Tax relief 226, 250, 252, 271, 327, 443 Uruguay Round 85, 185
Index 529
Utilisation of resources/production Wealth accumulation policy 68, 422, 427,

capacity 95, 321, 366, 395, 410, 429, 451 439, 473-474
Utility 369, 391, 397, 410-411, 456, 493 Welfare state 34, 40-41, 80, 103, 123, 126,
145, 231, 243, 278, 286, 309, 339, 343,
358, 395, 404, 406, 412, 422, 424-245,
V 427, 455-456, 488
Win-win situation 372, 418, 493
Value at risk 73 Works assembly 267
Venture capital 99, 163 Works council 30, 108, 110, 221, 266-267,
Vocational training 42, 79, 138, 148, 151, 296, 299, 383, 418
193, 195, 219, 231, 245-246, 282, 296, World Bank 138, 259, 280, 288-289, 340,
301-302, 471-473 390,
Volatility 243, 280, 493 World trade 222, 242, 280, 287, 475, 485
World trade order 86, 241, 288, 474-476,
485, 490
W World Trade Organization (WTO) 222,
242, 275, 288-289, 406, 476
Wage agreement 39, 110, 135-136, 155-
156, 266, 295, 383-384, 419
Wage negotiations 158, 437, 460 Y
Wage demands 117, 119, 155, 158, 351,
384, 403-404 Year-end accounts 353
530
Appendix
Selected German economic research and advisory institutions
Arbeitsgemeinschaft Selbständiger ifo Institut für Wirtschaftsforschung

Unternehmer e. V. (ASU) München e. V.
(Working Group of Independent Entrepreneurs) (Munich Institute for Economic Research)
Reichsstraße 17 Poschingerstraße 5
14052 Berlin 81679 Munich
Tel.: 030 300650 Tel.: 089 92240
www.asu.de www.ifo.de
Aktionsgemeinschaft Soziale Institut der deutschen Wirtschaft e. V.

Marktwirtschaft e. V. (ASM) (IW)
(Social Market Economy Action Group) (Institute of the Germany Economy)
Mohlstraße 26 G.-Heinemann-Ufer 84-88
72074 Tübingen 50968 Cologne
Tel.: 07071 550600 Tel.: 0221 4981510
www.asm-ev.de http://www.iwkoeln.de
Europa Kolleg Hamburg Institut Finanzen und Steuern Bonn

Institut für Integrationsforschung (Bonn Institute of Finance and Tax)
(Institute for Integration Research) Markt 14
Windmühlenweg 27 53111 Bonn
22607 Hamburg Tel.: 0228 98221-0
Tel.: 040 822727-0 http://www.ifst.de
www.europa-kolleg-hamburg.de
List Gesellschaft e. V.
Deutsches Institut für Wirt- (Cunning Society)
schaftsforschung e. V. (DIW) Universität Münster
(German Institute for Economic Research) Am Stadtgraben 9
Königin-Luise-Straße 5 48143 Münster
14195 Berlin Tel.: 0251 8322904
Tel.: 030 897890 http://list-gesellschaft.de
www.diw.de
Ludwig-Erhard-Stiftung e. V.
Forschungsstelle zum Vergleich (Ludwig Erhard Foundation)
Wirtschaftlicher Lenkungssysteme Johanniterstraße 8
(Institute for Comparative Economic Systems) 53113 Bonn
Universität Marburg Tel.: 0228 53988-0
Barfüßertor 2 http://www.ludwig-erhard-stiftung.de
35032 Marburg
Tel.: 06421 28-23196
www.wiwi.uni-marburg.de/ Lehrstuehle/
VWL/WITHEO2/forschung/forschung.htm
Appendix 531
Max-Planck-Institut zur Erforschung Institut für Wirtschaft und

von Wirtschaftssystemen Gesellschaft Bonn e. V. (IWG)
(Max Planck Institute for the Research of (Bonn Institute for Economics and Society)
Economic Systems) Ahrstraße 45
Kahlaische Straße 10 53175 Bonn
07745 Jena Tel.: 0228 3720 4445
Tel.: 03641 6865 http://www.iwg-bonn.de
www.mpiew-jena.mpg.de/deutsch
Institut für Wirtschaftsforschung Halle
Rheinisch-Westfälisches Institut für e. V.
Wirtschaftsforschung e. V. (RWI) (Halle Institute for Economic Research)
(Rhenish Westphalian Institute for Economic Kleine Märkerstraße 8
Research) 06108 Halle/Saale
Hohenzollernstraße 1-3 Tel.: 0345 775360
45128 Essen http://www.iwh.uni-halle.de
Tel.: 0201 81490
www.rwi-essen.de Hamburgisches Welt-Wirtschafts-
Archiv (HWWA)
Wirtschafts- und Sozialwissenschaft- (Hamburg World Economy Archives)
liches Institut der Hans-Böckler- Neuer Jungfernstieg 21
Stiftung (WSI) 20347 Hamburg
(Hans Böckler Institute for Economics and Tel.: 040 428340
Sociology) www.hwwa.de
Bertha-von-Suttner-Platz 1
40227 Düsseldorf
Tel.: 0211 7778187 Institut für Wirtschaftspolitik an der
www.boeckler.de Universität zu Köln
(University of Cologne Institute for Economic
Zentrum für Europäische Policy)
Wirtschaftsforschung GmbH (ZEW) Pohligstraße 1
(Centre for European Economic Research) 50969 Cologne
L 7,1 Tel.: 0221 4705347
68161 Mannheim www.uni-koeln.de/wiso-fak/iwp
Tel.: 0621 123501
www.zew.de Konrad-Adenauer-Stiftung e. V.
(Konrad Adenauer Foundation)
Institut für Weltwirtschaft Kiel (IFW) Rathausallee 12
(Kiel Institute for World Economy) 53757 Saint Augustin
Universität Kiel Tel.: 02241 246 0
Düsternbrooker Weg 120 Fax: 02241 246 591
24105 Kiel
Tel.: 0431 88141 Klingelhöferstraße 23
www.uni-kiel.de/ifw 10785 Berlin
Germany
Tel.: 030 26996 0
Fax: 030 26996 217
http://www.kas.de
532 Appendix
Institut für Angewandte Osteuropa-Institut München

Wirtschaftsforschung Tübingen (IAW) (Munich Institute for Eastern Europe)
(Tübingen Institute for Applied Economic Scheinerstraße 11
Research) 81679 Munich
Ob dem Himmelreich 1 Tel.: 089 9983960
72074 Tübingen www.lrz-muenchen.de/~oeim
Tel.: 07071 98960
www.uni-tuebingen.de/iaw Finanzwissenschaftliches
Forschungsinstitut an der Universität
Forschungsinstitut der Friedrich- zu Köln
Ebert-Stiftung e. V. (University of Cologne Research Institute for
(Friedrich Ebert Foundation Research Institute) Finance)
Godesberger Allee 149 Zülpicher Straße 182
53175 Bonn 50937 Cologne
Tel.: 0228 883228 Tel.: 0221 426979
www.fes.de www.wiso.uni-koeln.de/finanzfors
Walter Eucken Institut e. V.

(Walter Eucken Institute)
Goethestraße 10
79100 Freiburg i. Br.
Tel.: 0761 790970
www.eucken.de
Forschungsinstitut für
Wirtschaftspolitik an der Universität
Mainz e. V.
(University fo Mainz Research Institute for
Economic Policy)
Jakob-Welder-Weg 4
55122 Mainz
Tel.: 06131 374770
www.ffw-mainz.de

Social Market Economy

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Social Market Economy

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History, Principles and

All rights reserved

Translator: Vera Leckie

First published in German: Lexikon Soziale Marktwirtschaft – Wirtschaftspolitik von A bis Z

Dr Hermann Schneider was born in Niederwalgern (near Frankfurt) in 1940. He

Dip Vw (Master in Economics) Klaus Weigelt was born in Königsberg, Prussia,

language. Cross-referencing makes the book more user-friendly, while a glossary is

Rolf Hasse Hermann Schneider Klaus Weigelt

Alphabetical list of biographies and themes 11

Sub-division of themes 495

List of tables, figures and other illustrations 505

List of contributors 507

Biographies and other personalities 515

Selected German economic research and advisory institutions 530

Alphabetical list of biographies and themes

Beckerath, Erwin von 27

Dietze, Constantin von 31

Erhard, Ludwig Wilhem 34

Eucken, Walter Kurt Heinrich 36

Hayek, Friedrich August von 40

Höffner, Joseph Kardinal 43

Lutz, Friedrich August 47

Nell-Breuning, Oswald von 53

Nipperdey, Hans Carl 57

Act Against Restraints of Competition 81

Balance of payments equilibrium 85

Banking system, structure and supervision 86

Basic rights, the Basic Law and social market economy 89

Basic social security 91

Business accountancy: Basic concepts 93

Business cycle policy 96

Catholic social doctrines 100

Chamber system 103

Chambers of commerce and industry 104

Circular flow of incomes, national income and 106

Collective agreements 109

Concerted Action and Alliance for Employment 116

Conflicting aims in economic policy 118

Consumer policy 126

Council of Experts 128

Currency system and exchange rate regimes 129

Demographic development 131

Development aid, development policy 137

Economic ethics 141

Economic orders: Theory and implementation 143

Education and research policy 146

Education funding 148

Employment policy 157

Enterprise, plant 159

Entrepreneur, manager 161

Environmental impact 163

Environmental policy: Actors 165

Environmental policy: Conflicting aims 167

Environmental policy: Instruments 167

Environmental protection objectives 169

Environment-oriented management 171

European Central Bank, German Federal Bank 172

European Economic and Monetary Union 174

European monetary policy: Actors 178

European monetary policy: Aims and duties 179

European monetary policy: Instruments 180

European monetary policy: Strategies 182