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Principles of the "Social Market Economy" (December 19, 1962)

Professor Alfred Müller-Armack, state secretary in the economics ministry and one of Ludwig Erhard’s chief advisors, coined the term “Social Market Economy” back in 1946. While based on the principles of market economics, the Social Market Economy was not laissez-faire capitalism. Rather, as Müller-Armack argues in the speech below, it was a social and economic order built on the foundation of free competition and a concern for social welfare. He describes it as the foundation of the “Economic Miracle” of the 1950s but argues that the time had come for the Social Market Economy to move into its second phase – one in which sociopolitical objectives would be given more prominence. Economic policy, he notes, would not be given less significance, however. Here, he emphasizes the importance of monetary policy in increasing wealth.

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The Sociopolitical Model of the Social Market Economy

[ . . . ]


The Social Market Economy is a social and economic system. Major political decisions are not affected by it; but since a substantial part of our life is involved in economic and social relationships, it also has political significance. The whole world is in a state of tension between East and West. Within this framework, which is fixed by nuclear deterrents on both sides, the possibilities for action by the free West are limited. Thus the deliberate assertion of its inherent form of freedom is all the more important. To be sure, the Social Market Economy cannot and should not serve as a counter-ideology; nevertheless, it is a formula under which the West’s self-conception can assume an appropriate form. If we aim at deliberately safeguarding our way of life against the East, then it is not enough to act pragmatically in this or that way; instead, it is necessary to consciously shape our way of life in accordance with a guiding model. As far as I can tell, there are presently only two such models capable of demonstrating the power of the West to assume new forms as compared to the East: European Integration and the Social Market Economy. The free West needs integrating ideas as an answer to the challenge from the East to offer a better solution to social problems. Anyone in the West who fails to make the guiding model as clear as possible and pursues mere day-to-day politics instead will prove no match for the East. Nothing will deal a harder blow to the ideology-driven thinking of the East than the clear ability of the West to find better, more humane, freer, and more socially-minded solutions to the challenges of life in today’s world. The East’s reaction to the progress of the European Economic Community, which is gradually being recognized as a new established fact, shows what options will exist if we continue to clarify the ideas behind our way of life in our own minds as well.


My attempt to clarify the idea of the Social Market Economy begins with the question: What is the Social Market Economy? This question might seem too broad, but it is necessary for an understanding of this system. Little is gained from using the linguistic formulation as a point of departure and defining it as “a free market economy with socially-minded goals and opportunities.” This combination of words came as a surprise when the term Social Market Economy was coined in 1946, at a time when economic steering and dirigisme were asserting their monopoly on social security and when it seemed paradoxical to see, in a market economy that had been deliberately dismantled over the course of a decade for social reasons, a better system for the broad masses as well. Meanwhile, it has long been recognized that a deliberately structured market economy safeguarded by a system of competition can offer a better guarantee of social progress, especially through the deliberate organization of interventions in keeping with the market. It has also been recognized that the redistribution of income in government budgets can allow social progress to occur all the more effectively on the basis of a free [economic] system, as progress in competition forms the economic basis of social intervention. Thus, the Social Market Economy does not mean renouncing social and sociopolitical intervention. A fully valid system of economic policy could be organized while completely maintaining its coordination with the market economy, whose essential needs are to be taken into consideration.

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