The Seeds of Complacency

The economics minister in the postwar years, Ludwig Erhard, embraced a new idea, coined by the economist Alfred Müller-Armack, that proved to have enduring force: the social-market economy. It was a riposte to Soviet-style socialism, of which the promise of economic equality was appealing to some Germans at the time, suffering as they were from lack of basic food and shelter. Erhard, a conservative who later became chancellor and is considered one of the founding fathers of postwar West German democracy, struck a social contract that endures to this day. The state would protect German citizens from the harsher consequences of capitalism, while giving German entrepreneurs enough freedom to compete in the foreign markets that were so essential to their success. Lacking Otto von Bismarck’s cynical intent, it was a variation on the health insurance and pensions that the Iron Chancellor had used in the previous century to contain democratic unrest. This time, the idea was to undercut any possible appeal of the model taking shape in East Germany. The disadvantage of the system, however, was that it ran the risk of muting signals from the market and encouraging complacency.