Happy Birthday, Ludwig Erhard!

Is a democratically legitimized market economy still the model of choice today? Are totalitarian capitalist models like China’s more efficient in the long run? How can the extraterritorial, virtual-data world be regulated in such a way that the rules of the “real” world apply? How can we prevent a “metaverse” that defies earthly laws and human empathy? What must economic incentives look like to effectively counter the climate crisis and prevent societies from drifting apart? The competition between different systems, regulation, social coexistence: three topics that economist Ludwig Erhard would have probably dealt with today.

Further developing Erhard’s model

Erhard was born in Fürth, Bavaria, on February 4th, 1897. He died in Bonn in 1977. Erhard was one of the founding fathers of the Social Market Economy. After a devastating Second World War, it was his model that made Germany’s economic reconstruction possible. The idea, he said, was to “combine the principle of freedom in the market with that of social balance and the moral responsibility of each individual toward the whole.”

Adopting this model one-to-one no longer meets today’s requirements. It has long stood the test of time. Today’s economy, however, is global. The pace is faster than ever before. As a result of the Fourth Industrial Revolution, disruptive changes are more powerful and profound than those of any of the previous three industrial revolutions. But it is still worth reading Erhard’s work today – in particular “Prosperity for All” (“Wohlstand für Alle”). It is a solid foundation for the model we must develop today. A model that can succeed under the difficult conditions of the 21st century.??

Freedom and responsibility

Which of Erhard’s ideas still apply today? For me, the idea that freedom and responsibility are inseparable is as relevant today as it was then. Erhard said: “Freedom must not become idol worship without responsibility, without commitment, without roots. The combination of freedom and responsibility requires order.” In other words, we need a modern and reliable regulatory framework. It is the task of governments to define goals, rules and incentives and shape future-oriented economies. Governments must also answer the questions: What is their task? And what does the private sector do? What must be clear: Governments are responsible for setting the framework – preferably in such a way that entrepreneurial performance pays off. After all, economic performance is the prerequisite for social security to work. And companies can only live up to their social responsibility when they are profitable and sustainably competitive. Because you can’t give what you don’t have.?

Owner-managed Small and Medium-sized Enterprises (SMEs) set good example

Erhard had no use for what he called “buccaneering economic liberalism.” And he would likely not have subscribed to the mantra that “the business of business is business” – a mantra, attributed to Milton Friedman, which has dominated the world economy for far too long and is still visible in parts of the global capital market. Today, it is clear that this kind of capitalism, which is only focused on profit maximization, has gone too far. It has put many?societies to the test. During the financial crisis in 2008, “predatory capitalism,” as some call it, showed its ugly face and brought companies and entire economies to the brink of collapse. Today’s modern companies also have a duty to serve society. They should be successful in economic terms by being innovative, creative and productive. They need to build or regain their credibility. Craft professions and the mostly owner-managed SMEs provide good examples of innovative and responsible corporate governance. But large companies can do it, too.

Aligning with ESG and 17 Sustainability Goals

By, for example, living up to their responsibility: by consistently aligning their business with the United Nation’s 17 Sustainable Development Goals; by taking “ESG” (Environmental, Social, Governance) seriously – and not by misusing it for greenwashing. Economic models that promote such corporate alignment must prevent social inequality from widening. According to a study by Oxfam , the fortunes of the ten richest people have doubled during the pandemic, while millions have slipped into poverty. The social fabric is at a dangerous tipping point. Structurally: due to globalization, digitalization and demographics. And currently: due to the uncertainties of an all-consuming pandemic. A “business-as-usual” approach will not work – just as it no longer works in climate policy. ?

System update

We need a system update – or more precisely: We need a further development of the Social Market Economy. Freedom and responsibility, not freedom instead of responsibility – or responsibility instead of freedom. In view of today’s disruptive changes, we need to think much more about the factors of inequality and ecology. We need to take them into account in our strategy models – as governments, companies and as responsible individuals in society. Fighting inequality means: more educational justice and a supportive as well as demanding welfare state. Commitment to ecology means leading the world onto a 1.5-degree path. We need to implement the numerous “net-zero” plans and invest in innovative environmental technologies for sustainable growth.

Social, ecological, market-based

I am convinced: Building a system that combines social inclusion, ecology AND the free market is THE challenge of our time. It is about integrating these elements into one system. All three are dependent on each other – on their own, they are headed to a dead end. Social responsibility requires economic strength. The ecological transformation needs social peace and a market framework that enables innovation and promotes performance. And the legitimacy of the free market in society depends on whether it promotes the social AND the ecological. Following Erhard’s ideas, this system could be called a “Social-Ecological Market Economy.” In today’s competition of systems, a Social-Ecological Market Economy can be attractive to those which seek a balance between freedom and responsibility. It is, in my view, the best option to address our current challenges in a more holistic way. “Democracy and a free economy logically belong together – just as much as dictatorship and state economy,” Erhard said.?

Erhard was – without a doubt – a first-class salesman. He ceaselessly promoted his ideas. He sought dialogue and was able to convince. To paraphrase Erhard, "A formed society presupposes an informed society." What can we still learn from him today? Definitely also the art of marketing and persuasion. His image, the man with the cigar, is iconic. The slogan “Prosperity for All” a clear message. The term “Social Market Economy” – long symbolically advertised as a “scale” – was a globally recognized trademark. And still is many decades?later. All these elements stand for a promise of security, prosperity and freedom. Today, we’d call this a “narrative.” We need such a future-oriented narrative again.

Prosperity for all – dignity for all

Even if “Prosperity for All” has become a promise harder to fulfill, it should at least remain a promise of “Dignity for All.” It is up to us to define this promise – and fill it with life. Germany – despite all its challenges and bumps, despite some shortcomings and failures – is one of the strongest countries in the world. We have the world’s best craftsmanship, the best engineers and the brightest minds in many fields. Our middle class is the envy of the world. We have a reliable government and legal system. We are a prosperous country. We should not see this as an invitation to relax but as an incentive to shape the future. The incentive to leave our children and grandchildren a world better than the one we were born into. That was Ludwig Erhard’s narrative. We should make it our narrative.

Happy Birthday, Dr. Erhard!?

#InclusiveCapitalism #SocialMarketEconomy