223
East and West Germany reunified in
1990, a year after the fall of the Berlin
Wall (right). East Germany abandoned
its centrally planned economy to merge
with West Germany’s social market.
See also: Markets and morality 22–23 ■ Free market economics 54–61 ■ Marxist economics 100–05 ■
Collective bargaining 134–35 ■ The Keynesian multiplier 164–65
POST-WAR ECONOMICS
These economists aimed to
achieve what Müller-Armack
called a social market economy:
not just a “mixed economy,” with
government providing a bare
minimum of necessary public
goods, but a middle way between
free market capitalism and
socialism that aimed for the best
of both worlds. Industry remained
in private ownership and was free
to compete, but government
provided a range of public goods
and services, including a social
security system with universal
health care, pensions,
unemployment benefits, and
measures to outlaw monopolies
and cartels (agreements between
firms). The theory was that this
would allow the economic growth
of free markets but at the same
time produce low inflation, low
unemployment, and a more
equitable distribution of wealth.
Economic miracle
The mixture of free markets with
elements of socialism worked
dramatically well. Germany
experienced a Wirtschaftswunder
(“economic miracle”) in the 1950s
that transformed it from post-war
devastation into a major developed
nation. Similar social market
economies developed elsewhere,
notably in Scandinavia and
Austria. As Europe made moves
toward economic union, the social
market economy was extolled as
the model for the European
Economic Community in the
1950s. Many countries in Europethrived under some form
of social market economy, but by
the 1980s some—most notably
Britain—were attracted by the
ideas of Milton Friedman (p.199),
who advocated “smaller”
government. British prime
minister Margaret Thatcher
criticized the European model for
its state intervention and high
taxes, which she believed
hampered competition.
With the collapse of
communism in the Eastern Bloc
the planned economies of Eastern
Europe were replaced by various
versions of the mixed economy.
At the same time some of the
remaining communist countries
made moves to introduce reform.
In China, for example, Premier
Deng Xiaoping adopted elements
of free market economics to operate
within the centralized economy,
in what he described as a “socialist
market economy with Chinese
characteristics.” His aim was
to promote economic growth and
become competitive on the world
stage. Today, China’s economy is
still a long way from the European
social market model, but it has
made significant moves toward
becoming a mixed economy. ■The Nordic model
While the German social market
is associated with right of center
politics, the economies of
Scandinavia developed along
similar lines but were politically
left of center, with more focus on
making the markets fair.
The so-called Nordic model
is characterized by generous
welfare systems and a
commitment to fair distribution
of wealth, achieved through
high taxes and public spending.
These countries have enjoyedhigh living standards and strong
economic growth, helped by
having small populations with
strong manufacturing industries
and, in the case of Norway, oil.
Today, there is pressure to
reduce the role of the state in
order to remain internationally
competitive. However, change
is gradual: governments are
mindful that deregulation in
Iceland in the 1990s led to
economic growth followed by
a financial crisis.