The social market economy

January 25, 2012

Capitalism is the name people give to the way the modern economy is arranged. Now that Communism has been discredited as an economic system, there seems to be no real alternative. But the word is misleading.

A capitalist analysis of any economic issue starts with capital, both physical capital – factories and land – and financial – shares and bonds. It is associated with free and competitive markets for goods and labour.  And capitalism has come to designate a system where private property is the norm, with any exception needing some sort of justification. Capitalist analysis usually treats governments and unions as economic interlopers, and ignores the broader society.

That perspective is too narrow. Capital and markets are only two parts of the complex modern economic system. People don’t only matter because they bring their labour to the owners of capital – as in the original, 19th century definition of capitalism. And governments over the years have become regulators and keepers of the monetary order. Moreover, the economy is so closely integrated with modern society that no clear border separates the two. Social forces – such as the thirst for technological innovation, the work ethic and other moral values – play a fundamental part and influence the workings of the purely “capitalist” system.

A limited analysis often leads to unnecessarily grim prognoses. Think back to the 1960s, when environmental pollution was first identified as a serious problem. Many observers, enthusiastic capitalists among them, thought that the capitalist system couldn’t deal simultaneously with environmental goals and the search for profits. Economic disruptions were predicted. But changes in the law, technology, corporate priorities and cultural values combined to bring about a remarkable success in reducing noxious emissions, without noticeable harm to prosperity or profits.  The system found a way to price externalities without endangering itself.

Half a century later, people, including enthusiastic capitalists, are again wondering whether the system can survive. Now they cite the long financial crisis, or issues such as the exorbitant privileges of the very rich. They are not wrong to be concerned. If the economy were simply or primarily capitalist, either of these problems could well be lethal. After all, neither factory nor financial capital can be expected to allocate income and wealth justly. And the financial system could be too wounded to heal itself.

But the separation of the rich from the rest in some countries isn’t basically a failure of either capitalism or free markets. At bottom, it is a sign of inadequate social solidarity. The more direct causes, from politicians and regulators’ complacency to society’s general indifference regarding corporate pay, are more social than economic problems. The solutions – new rules, taxes, and behavior – will have little to do with the functioning of the core capitalist system.

Similarly, the financial disorder may look like a crisis of capitalism, but its causes and cures are political and moral. Financial markets have failed because politicians tried to give citizens more wealth than they have earned, bankers forgot the common good, governments refused to live within their means and investors’ greed was celebrated rather than restrained. No solution limited to the technical operations of the financial system can work for long, unless it is a reflection of changed political and moral attitudes.

Words are not everything, but the unquestioned identification of the modern economy as “capitalist” tends to constrain economic arguments. The debate is almost completely stifled when hyper-capitalists assume that any impediments to free markets are regrettable signs of  “market failure”. That dismisses most of the economy – from the government’s 40 per cent share of GDP to the 90 percent of the workforce employed in meritocratic bureaucracies. But the capitalist obsession also limits the insight of economists friendlier to government intervention and more skeptical about free markets. They tend to downplay social values and ethical analysis.

A new name for the modern economy might encourage a broader approach. Something bland might work — the business, or the industrial economy. I prefer a title that has a bit of spin on it. Acronyms are fashionable; perhaps it is time to introduce the BCRINCF economy — bureaucratic, competitive, regulated, innovative, collaborative and financial. But that’s a mouthful.

I suggest the “social market economy”. The term was coined in Germany after the Second World War to show that capitalism could be combined with a strong government presence, workers participation in company boards and an extended social safety net. The combination is still apt, as each of the two words captures something essential. “Market” takes in capital, competition and the eager striving for improvement. “Social” pays tribute to the human element and the need for economic activity to serve the common, social good. It is appropriate that social comes first in the title, because the modern economy is a largely a construction by and for the whole community. If it had been merely capitalist, it would not have lasted this long.


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As governments over the years have insinuated themselves into the economies of modern society, their inept diddling is increasingly and adversely affecting the work ethics and other moral values of their citizens. An excellent example is that farmers paid to not farm quickly learn that there is more money to be made “farming” the “system” than farming the land…clearly contrary to what they did under an earlier and more pure “capitalist” system. Last night on the news (now that air fares must include ticket, fees AND taxes as a “total”) one airline’s “ticket” appeared to be only one third of the total! Always the “shell game” and NEVER simple.

Back in the ’60s, those “observers” of the 1960s that “thought the capitalist system couldn’t deal simultaneously with environmental goals and the search for profits” were 100% right. Changes in the law, technology, corporate priorities and cultural values did have considerable success in reducing noxious emissions, but look at how much manufacturing has left the United States for countries willing to “look the other way” over those years.

Americans today can buy inexpensive goods made elsewhere without the associated environmental economic penalties, but an ever-increasing Americans are today without productive work. Ya think these things are related? If so, prosperity HAS been harmed!

Today it is true that people ARE less wondering WHETHER the “system” can survive, but HOW. I don’t see the current “financial disorder” a problem of “politicians and regulators’ complacency”, but rather of politicians and regulators’ ever increasing incompetency. That is WHY “politicians tried to give citizens more wealth than they have earned, bankers forgot the common good, governments refused to live within their means and investors’ greed was celebrated rather than restrained.” There is simply no rational justification for the U.S. government to represent 40% of America’s Gross domestic Product (GDP).

I totally agree that “the way out” must be by way of “changed political and moral attitudes”, but such change must be in those “in charge” and not we, the victims. I fear your “social market economy” concept will prove all but indistinguishable from a “Socialist Market Economy” which might describe what we see today in China. Is that really the destination “we, the people would choose for these United States of America?

Posted by OneOfTheSheep | Report as abusive

who is poster OneOfTheSheep, I have to ask are you paid to post?do you have a web site or a blog? are you affiliated to any political organization?

Posted by Gillyp | Report as abusive

I am a married, American citizen that is retired and primarily living on Social Security. No. No. No.

We each see “life” and “reality” through a unique prism of personal experience and perspective. Unfortunately, pressures to conform in American society are pervasive.

My goal in posting is primarily to stimulate others to think for themselves, and preferably “outside the box”. The role of “devil’s advocate” is not infrequently an effective means to such end. My comments are always intended to “advance the truth” since the “story” and the “truth” are not always well acquainted.

Posted by OneOfTheSheep | Report as abusive

An excellent take on the current situation, and one I agree with. The focus on ‘capitalism’ is far too narrow. In my opinion, the problem we face is 1) ultimately self correcting, and 2) quite dangerous in the short term. Throughout human history there have been endless numbers of terrible governments, environmental disasters, and crises of every kind, but we as a species survive. We’ll survive this too. The problem is that as we work our way out of our current crisis, millions of people have their lives ruined, some irreparably. In my view, one of the functions of any responsible government is reduce the time it takes to overcome a crisis, while minimizing the number of people affected. Most governments do a very bad job of this. One the one hand, many people in politics refuse to observe and think, and instead rely on ideology to solve the problem. The others believe that government is the repository of all knowledge and should exert total control. Neither of these have ever worked, or ever will. The solution lies, in my view, in being intelligent enough and agile enough to make changes, try new solutions, and modify as we go along based on what works and what does not work. Unfortunately, as the current US presidential campaigns demonstrate, the electorate insists on trying the same solution over and over, and expecting different results – the definition of insanity.

Posted by steve778936 | Report as abusive

OOTs still claims his wants to advance truth but he really is an old codger like me who likes to see his words in print.

What’s in a name? That could just as easily serve as Mr. Hadas’s cogent article’s title.

The “truth” of the matter of economic systems is that most people don’t really care what economic system they are trapped in is as so long as it provides them a means to satisfy their vital needs at the very least, and if it can make them happy – that is all the better.

The constitution makes no claim to being any kind of economic system and that was largely because it was written before the study of economics even had a name for what is called “capitalism”.

The Constitution was written to regulate what one could call protean powers and the distribution of them within a society and a government.

Posted by paintcan | Report as abusive

Capitalism is like any engine, with out a a regulator the engine consumes to much fuel and destroys its self…

Posted by Gillyp | Report as abusive

[…] does this fit with the principle of tax justice? In our social market economies, taxes should primarily serve the social side of the system. A just tax system will follow what […]

Posted by The tough road to sensible taxes | Edward Hadas | Report as abusive

Why are no thinkers taking (excess of) capitalism head on? There are no alternative suggestions. No convincing objections. Everybody knows inequalities beyond a certain limit stunt growth. Yet nobody wants to say or explain that.

Posted by sukumo | Report as abusive

Worthy sites…

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Posted by Anwar Sadhe | Report as abusive