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The Economic Comeback of Germany

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08/25/2009Hans F. Sennholz

Among other things, the appearance of the German Volkswagen on American highways has stirred the imagination of the friends of free enterprise. Here, apparently, is another visual proof of the superiority of capitalism over socialism, another demonstration of West Germany's abandonment of economic controls, another evidence that Germans have embraced the philosophy of the free market.

Hence, it may come as a shock to libertarians to learn that the "miracle" of Germany's revival was not the result of a conscious rejection of socialism, but was rather an accident of political and social conditions. There is evidence, too, that the current market economy of Germany is in grave danger of being destroyed by the very people who built it up.

In 1947, when millions of Germans were starving and living in incredible poverty, and when the full threat of the Morgenthau Plan was upon it, there certainly was no general demand for the free market. Rather, the popular majority was for what its principal advocate, a socialist party leader by the name of Dr. Agartz, called the "new kind of socialism." This called for the ownership and operation of the tools of production by workers under the supervision of government. It amounted to politically controlled producers' cooperatives.

But economic control is not possible without political power, and the "new kind of socialism" had to be deferred.     Throughout the postwar period the German political parties concentrated on attacking the occupation powers for the severity of their controls. To libertarians in this country the German call for freedom sounded like a demand for a free market. This was not so. What most Germans meant by freedom was liberation from foreign occupation and, above all, freedom to impose their own controls.

Three Factors

How, then, did Germany happen to stumble on the market economy? The answer lies in the political and economic situation of Germany after the war. Three factors, none of which is ideological, contributed to the establishment of a sort of market system.

The first was the fact that Germany had reached the end of the socialist road. The socialist system of distribution had completely collapsed and production was almost at a standstill. There was nothing left to distribute, nothing to be rationed. The hundreds of thousands of officials who enforced the mass of economic laws — all enacted by the former Reichstag — were perplexed and helpless. Millions, of whom I was one, depended upon and actually lived by the "black market."

More and more people became convinced that socialism had to be retracted a step in order to increase production; the wicked capitalist incentives of profit and ownership had to be temporarily reinstated. Just as Lenin's New Economic Policy had given Russia a breathing spell for about seven years, so Germany was to have a rest period on her way to the "higher social order."

The second factor that led to the emergence of a market economy was the presence of a few very astute politicians who molded a new political party — the Christian Democratic Union. Under the brilliant leadership of Dr. Konrad Adenauer they created a political counterweight to the socialist organization, the Social Democratic Party, which openly advocated Marxian doctrines. Drawing heavily on the support of the hierarchy of the Catholic Church, they united the opponents of Marxian socialism in a new organization. They shrewdly opposed the socialists on every major issue.

For instance, they favored decentralization, orientation to the West and, above all, a "social market economy." This planned opposition to an old Marxian party paid off in victory at the polls. But having opposed socialist economic planning for diplomatic reasons they saw no way but partly to realize the campaign promises when they formed the government. Thus the collapse of the socialist economy and the political maneuvers of a new party fighting for power contributed to the emergence of the market economy.

But the most important causative factor was still another. The German clamor for freedom was solely directed at the occupation powers. German freedom meant freedom from foreigners. To oppose the Allied occupation policies and to criticize Allied actions was a matter of national pride. But what brand of economic policies did the American, British and French military governments actually conduct?

In the first place they continued to enforce the existing German legislation and economic controls. To these they added their own socialistic supplements or interpretations. For a German politician to oppose the American administration, therefore, meant opposition to American Fair-Dealism in Germany. To oppose British policies meant opposition to British socialism. For the German opposition there was no choice but to fight socialism and Fair-Dealism. And so they bickered and struggled, the Allies for continued economic controls, the Germans for their abolition.

In enumerating the reasons for the existence of a market economy in Germany we must pay homage to a small group of scholars who raised their voices for freedom and free enterprise. Professor Walter Eucken in Freiburg and three scholars in Geneva, Mainz and Cologne wrote and spoke on the desirability of individual liberty and capitalism. But their voices were almost drowned out by the thunder of nationalist and socialist slogans.

Only when the market economy was established because of the reasons just described, and when economic freedom was beginning to shower its rich benefits on everybody, did recognition come to them. Professor Wilhelm Röpke of Geneva became the intellectual spokesman of the new era. It was mainly through him that the German public became aware of the fundamental changes of policy. His interpretation of the economic comeback as the inevitable outcome of capitalist policies found increasing acceptance. Today there exists a German school of political and economic thought for freedom and free enterprise which has its roots in the writings of Professors Röpke, Eucken and others.

Results — without Planning

When the German market economy showed its first miraculous effects nobody could have been more surprised than the Germans themselves. What a short time ago was merely a dream for the remote future or a difficult project for a five- or ten-year plan was now realized overnight without any government planning at all. Of course, the socialist politicians immediately began to reinterpret the economic facts. They hailed as the true reason for recovery the monetary reform which confiscated 95 percent of every citizen's cash holdings and bank deposits, or the genius of German labor and intellect or many other irrelevant factors. But they never laid it to capitalism.

The lack of an ideological foundation of capitalism in Germany can clearly be recognized in the procedure by which the economy was finally freed from many of its socialist shackles. If a libertarian were to face a similar situation he would take great pains to see that the production and distribution of vital necessities were freed from controls first.

In Germany, however, the economic liberation proceeded backwards. Unessential commodities and services were released first, such as paintings, stamp collections and ashtrays. Then followed other unessential goods that had vanished from the market. The consequence of this procedure was the immediate reappearance of nonessential commodities, while all necessities continued to be very scarce.

The Paradox

In the following stage of economic decontrol more and more goods were freed in sequence of their unimportance. But this process was halted long before the most essential things were reached. Today the German government still regulates rents, basic raw materials, the distribution of foreign exchange and many agricultural products. Needless to say, the products still under government control are scarce.

Because of social considerations, for instance, the German government continued to control rents and the allocation of housing while it released stores and other business space on the grounds that businessmen need no protection. The libertarian can easily guess what happened. Stores were rebuilt at a rapid rate while houses remained in rubble. Thus, because the government aimed to "protect" the worker from exploitation, many still dwell in basements. A typical example of the government welfare paradox!

I do not want to belittle the economic achievements of the German market economy. No matter how they stumbled upon capitalism, its fruits are real. But the German economic comeback in spite of the remaining shackles gives us reason to contemplate on what the recovery would have been if the policies had been libertarian throughout. It is my belief that a libertarian Germany would be well on her way now to becoming the most prosperous nation in the world, next to America. And even in this comparison a libertarian Germany in the long run would fare well against a Fair-Deal United States.

It is customary to compare the economic prosperity of Germany with that of her European neighbors. Our yardstick of comparison is the socialist postwar economy of Great Britain, or the present economy of France where 40 percent of the means of production is nationalized outright, and another 30 percent indirectly through the nationalization of the large banks which were the majority stockholders of French industry. Certainly the German market economy with all its mutilations outpaces its socialist neighbors; but what could it be if utterly freed?

Every seventh German is employed by the government or one of its numerous agencies and subsidiaries. That is to say, the economic welfare of every seventh citizen depends on higher taxation and an ever-increasing sphere of government power. In recent weeks the union of public servants demanded a 20 percent increase of salaries, on top of several such increases within the past few years. The new costs to the taxpayer will amount to several billion marks. More than 30 percent of private consumption is now financed out of means that have gone through public treasuries either in the form of taxes or other levies.

Secretary of Economy, Ludwig Erhard, the world famous inventor of "Professor Erhard's social market economy," is about to introduce a new economic bill of his liking, one that would give him power to regulate prices wherever he deems them "unreasonable." The bill is to replace a similar provision in the German Police Order which the Bundestag recently revoked against the ardent opposition of Professor Erhard. This brilliant politician, who certainly is no champion of capitalism, stubbornly clings to foreign exchange control, the most formidable means of government control over the economy.

In a country like Germany, in which a large part of raw materials is imported, every such import and the allocation of the necessary means of exchange must still be authorized by a government office. And the penal code of West Germany still contains severe penalties for unauthorized trade and foreign exchange dealings.

It appears logical to Professor Erhard to threaten businessmen with severe penalties for "unjustified" price increases and simultaneously to raise the price of agricultural products by way of government restrictions on imports. In cooperation with the powerful farm pressure group he raised the prices of butter by seven to 10 percent and is about to raise milk prices by 10 to 20 percent. Sugar prices have been increased until they now exceed world market prices by 40 percent. Although 380,000 tons of surplus sugar are now stored away, the federal government, according to the International Sugar Agreement, must import 140,000 tons from Cuba and 60,000 tons from Poland. Egg prices in Germany are 20 to 25 percent higher than in neighboring countries; those of rye and rye bread, a mere 80 percent. To raise the prices of provender for cattle and thus benefit the grain farmer, importation has been severely curtailed.

All this for the benefit of the "Bauer." The economic mistakes that led to the rise of Hitler during the late twenties and early thirties are being repeated. It is significant that this kind of policy is ardently defended by the Institute for Trade Cycle Research at the Berlin University, which has been rebuilt largely with American funds. According to this institute, "it has been established empirically that exports further the national economic growth, but imports impede and curtail it severely." Any criticism of this incredible confusion of mind by a few libertarian voices is labeled and disposed of as "ultraliberal."

Strength of the Unions

Last but not least, we must mention the vast labor union as a powerful task force of socialism. Out of a total of about 18,000,000 workers and employees, more than 12,000,000 are organized in the Labor Union Federation, which holds a monopolistic position on the labor market. On all political issues it closely cooperates with the socialist party.

When the government raised the ceiling prices of some rents, dozens of strikes were called and hundreds of rallies and protest demonstrations were organized. Many German factories were idle during this past summer. Now the union demands a 12 percent across-the-board increase of wages and many other benefits. Furthermore, it is clamoring for expansion of the system of "industrial codetermination." In West Germany labor union representatives sit on the boards of directors and participate in the management of industrial concerns; not because of property rights but because of recent "progressive" legislation.

Will the partially free market economy of Germany be allowed to expand? Will the handful of libertarian scholars and writers succeed in building a sounder ideological foundation for individual liberty and a free economy? The struggle between the forces of liberty and those of socialism continues. Right now, the libertarian forces seem to be in full retreat, and West Germany is advancing to familiar ground — to socialism.


Hans F. Sennholz

Hans F. Sennholz (1922-2007) was Ludwig von Mises's first PhD student in the United States. He taught economics at Grove City College, 1956–1992, having been hired as department chair upon arrival. After he retired, he became president of the Foundation for Economic Education, where he served from 1992-1997. He was an adjunct scholar of the Mises Institute, and in October 2004 was awarded the Gary G. Schlarbaum Prize for lifetime defense of liberty.