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Lay-off restraints explicitly define exit conditions and implicitly stipulate entry conditions by influencing the demand for labor (Siebert 1989b). Generalized wage bargaining allowing an organizational integration of the employees prevents a differentiation of wages according to occupation, sectors and regions. Moreover, the three types of regulation interact with each other. For instance, social security and lay-off regulations define the bargaining position of the trade unions.

Besides problems of moral hazard behavior, a regulating system protecting the individual may also give rise to a different attitude of individuals: they expect individual protection from the government and the regulatory system, and they tend to think in terms of aspirations against the government. There is a trade-off between the insider and the outsider, but much more important, there is a trade-off between individual protection and the open society characterized by Popper (1944, p. 174) as "competition for status among its members".

Definitely, there is a conflict between individual protection and the efficiency or flexibility of the system. This is possibly best documented in the discussion on the closing hours of stores (LadenschluPgesetz). On the whole, politicians have not been courageous in allowing or initiating more flexibility.

Erosion of the Market Mechanism. Subsidies for ailing and new industries, some forms of regulation, rent-seeking and the reduced flexibility in the labor market point out that the market mechanism is being endogenously eroded in a slow process. From hindsight such a process may have been checked better if the market economy had been explicitly laid down in the Basic Law.

Not having such a constitutional anchor, the legal system has been indifferent to the problem of "Marktkonformitat" with

respect to the system as a whole. Here is an open question:

g "Denken in Ordnungen" may not be sufficient as a defense.

Institutional Competition versus European Centralization

The institutional framework of Germany's social market economy will be affected by European integration, especially by the Single Market. There is a consensus to enter the Single market, but there is also some awareness that European integration may change the rules of the game. A little bit reminiscent of the discussion in the 1960s on the role of "planification", there is a debate on whether the institutional setting for Europe has to be defined centrally in Brussels or whether it can be delegated to a process of institutional competition.

Institutional competition means that different national institutional arrangements can exist simultaneously in a single market and that the rules of the country of origin (for a product or a service) are mutually recognized. The implication of institutional competition is the arbitrage of consumers and firms. Consumers vote with their purses and their feet and firms take advantage of differentials in national regulations. Countries compete for the mobile factors of production, and the emerging institutional setting is the result of an open-ended process. The most important impact of institutional competition will be to open up markets that so far have been closed due to national regulation.

The conflict between the strategies of institutional competition versus prior harmonization is an expression of a more deeper conflict of orientation: on a constitutional level, it is the conflict of federalism versus centralization. On a philosophical level, it is the conflict between liberalism in the classical or British sense versus a more planning-oriented approach. We here have diverging views on such issues as confidence in the functioning of markets or any type of interventionism, sovereignity of the consumer or the need for his or her "protection", the role and the size of the government, spontaneity of autonomous decision making and decentralized processes versus constructivism, or the English case law versus the logic of the Roman law. Europe is in a search of its institutions, and the showdown between the British and the French concept of Europe is still to come.

Nature and Environment

A fascinating issue is how the institutional system has dealt with the challenge of environmental disruption which was not recognized until the early 1970s. In terms of the economist, the environment became to be perceived as a scarce good being used for the competitive uses of consumption and of receiving wastes.

For our analysis it does not matter whether preferences for environmental quality have changed or whether the demand for the assimilative services of the environment has increased. There was a shock to the system, not exogenous as in the oil crisis, but endogenous.

Institutionally, the system reacted by attempting to create new property rights for the use of the environment as a waste receptacle and by signalling environmental scarcity to the subsystems of the economy. New laws for air quality management (Bundesimmissionsschutzgesetz, TA Luft, Abwasserabgabengesetz etc.) were introduced in the early 1970s and revised in the mid-1980s. Admittedly, these laws predominantly used the regulatory (licencing) approach to the environmental issue, but a debate has been going on in 1989 on institutional arrangements for environmental incentives. A new institutional arrangement has to be developed which puts a greater emphasis on price instruments. There is also the issue of a constitutional amendment with respect to the environment. I think one can be confident that the institutional arrangement can be changed to accommodate the environmental problem.

A challenge for an institutional setting is how it accommodates the vital interest of future generations (Siebert 1980). In the case of capital accumulation this issue can be left to private decisions. The value of a capital good can be sold by the generation retiring from production to the next generation. For the environment, new property rights have to be found that take the interest of future generations into account. The accumulation of pollutants over a time period of ten or twenty years in the environmental system has to be reflected in the price system. It will be a special challenge to the social market economy how strict irreversibilities will be incorporated into an institutional framework allowing a preventive environmental policy.

4. Conclusions Looking back over fourty years of Soziale Marktwirtschaft, the system has fared pretty well. It has allowed economic well-being, individual autonomy and an ample net of social security. It was not questioned by public opinion in Germany after having been accepted by the major parties. In a time of an Orwellian crisis of socialist planning in Eastern Europe, the relative merit of the social market economy is all but too apparent. As a matter of fact, the concept of social market economy with its principles may provide an orientation for the east European countries in their search for a better institutional setting for their economies. Institutional competition in Europe, if it is allowed to come into being, will be an envigorating stimulus for the system.

The social market economy has reacted as well to external shocks as to the inflow of refugees and the energy crises, and one can be confident that the environmental issue can be integrated into the system. What is now of concern is that the system will be slowly eroded endogenously by subsidies for ailing industries and by strategic trade and industry policy, by regulations favoring specific interests, by rent-seeking, by the inflexibilities in the labor market and by the conflict between a political demand to be secured by government and the overall necessity to have an open society allowing individual liberty.

Footnotes Germans tend to become very "grundsStzlich" on terms. For Eucken (1952, p. 252) a principle was a basic demand as a guide to action, not the goal itself.

See the discussion in the 1960s (Kloten 1989, pp. 12, 13).

I do not quite follow Eucken's four regulating principles. His fourth problem, namely inverse supply reaction, is not a major issue. His third problem that prices correctly reflect scarcity is a dominating issue (see section on Nature and Environment, p. 22).

In the early years of the Federal Republic strong political forces favored a centralization and some type of central planning.

If you do not like the old-fashioned example, look for natural gas price regulations in the United States in the 1970s and 1980s and some phenomena in trade policy such as upgrading or local content rules as a consequence of quantitative restrictions.

"Es erwies sich, da|3 die Gewahrung von Freiheit eine Gefahr fur die Freiheit werden kann, wenn sie die Bildung privater Macht ermoglicht, daj3 zwar au/3erordentliche Energien durch sie geweckt werden, aber daj3 diese Energien auch freiheitszerstorend wirken konnen" (Eucken 1952, p. 53).

The problem of political power (Macht) was a central issue to the Ordoliberals (Eucken 1952, p. 169).

o "In der Sozialordnung gibt es zahlreiche, damals unterschatzte, sich spater als schwerwiegend erweisende konstruktive Mangel" (Kloten 1989, p. 12).

q Possibly, fiscal federalism both in a spatial and a functional interpretation is an answer. By linking taxation and government financing to the supply of public goods the voter can see what the government is providing. This relates to the regional dimension of public goods (and financing) where regions decide on their public goods and the financing. It refers to the splitting up of some government services (railroads, postal services) into an infrastructure company owning the tracks or telephone lines and operating companies which can be private.

And it also implies a financing through user charges wherever possible.


Baumol, William, J.C. Panzar and R.D. Willig, 1982, Contestable Markets and the Theory of Industry Structure, San Diego.

Bernholz, Peter, 1979, "Freedom and Constitutional Economic Order". In: Zeitschrift fur die gesamte Staatswissenschaft, Vol. 135, pp. 520-532.

Buchanan, James, 1975, The Limits of Liberty, Chicago.

Deutsche Bundesbank, 1975, Deutsches Geld- und Bankwesen in Zahlen 1876-1975, Frankfurt/M.

Donges, Juergen, and Klaus-Werner Schatz, 1986, Staatliche Interventionen in der Bundesrepublik Deutschland. Umfang, Struktur, Wirkungen. Kiel Discussion Paper, No. 119/120.

Eucken, Walter, 1952, Grundsatze der Wirtschaftspolitik, Bern, Tubingen.

Europaischer Zentralverband der offentlichen Wirtschaft, 1987, Die offentliche Wirtschaft in der Europaischen Gemeinschaft, Briissel-Berlin.

Giersch, Herbert, 1960, Allgemeine Wirtschaftspolitik: Grundlagen, Wiesbaden.

Hayek, Friedrich v., 1944, The Road to Serfdom, London.

—, 1968, Wettbewerb als Entdeckungsverfahren, Kieler Vortrage, N.F. 56.

Hutchison, Terence W., 1979, "Notes on the Effects of Economic Ideas on Policy: the Example of the German Social Market Economy". In: Zeitschrift fur die gesamte Staatswissenschaft, Vol. 139, 1979, pp. 426-41.

—, 1981, "Walter Eucken and the German Social-Market Economy".

In: The Politics and Philosophy of Economies - Marxians, Keynesians and Austrians, Oxford, pp. 155-175.

Kloten, Norbert, 1989, 40 Jahre "Soziale Markwirtschaft", Deutsche Bundesbank, Ausziige aus Presseartikeln, Nr. 50,

22. Juni 1989, S. 10-16 Klump, Rainer, 1985, Wirtschaftsgeschichte der Bundesrepublik Deutschland, Wiesbaden.

Miksch, Leohhard, 1937, Wettbewerb als Aufgabe, Stuttgart und Berlin.

Mises, Ludwig v., 1926, Kritik des Interventionismus, Jena.

Miiller-Armack, Alfred, 1944, Genealogie der Wirtschaftsstile, Stuttgart.

—, 1946, Wirtschaftslenkung und Marktwirtschaft, Hamburg.

—, 1966, Wirtschaftsordnung und wirtschaftspolitik, —, 1978/ "Social Market Economy as an Economic and Social Order". In: Review of Social Economy, No. 3, pp. 325-31.

Popper, Karl, 1944, The Open Society and its Enemies, London.

Ropke, Wilhelm, 1942, Die Gesellschaftskrisis der Gegenwart, Erlenbach-Zurich.

—, 1958, Ein Jahrzehnt Sozialer Marktwirtschaft in Deutschland und seine Lehren. Aktionsprogramm der Aktionsgemeinschaft Soziale Marktwirtschaft, Koln - Marienburg.

—, 1963, Economics of the Free Society, Chicago.

Riistow, Alexander v., 1932, untitled contribution to a discussion. In: Deutschland und die Weltkrise, Schriften des Vereins fur Socialpolitik, vol. 187, Dresden, pp. 62-69.

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