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Erhard and Ordo Liberalism

Ludwig Erhard is the politician who do the most to shape post-war Germany. and Europe. Sir Vince Cable describes his embrace of ordo liberalism.
The politician who did most to shape the economic architecture of postwar Germany, and indirectly Europe, is Ludwig Erhard. His legacy after 14 years as economic minister and then as Chancellor of Germany from 1963- 66 was a booming, stable, successful German economy. And this enviable record has been appropriated by ideologues of both left and right, but in ways that are seriously misleading. He was an advocate of a social market, Soziale Marktwirtschaft. And this was seized on by Social Democrats and followers of Tony Blair and Bill Clinton as a believer in free market with a social conscience. He was, however, a European liberal rather than an Anglo-Saxon liberal and was not a believer in state intervention or redistributive policies.
His legacy was also claimed by those on the other political extreme, radical free market advocates in the tradition of Hayek and in the UK, Mrs. Thatcher. But the reality was more subtle and better captured in the German word ordoliberalism, a free market economy within the framework of order in which there’s an underlying social stability resting on church, family, shared moral values, and respect for institutions. Mrs. Merkel’s Christian Democrats come very close to realising this philosophy in present-day Germany. Now, Erhard’s post-war credibility stemmed in substantial part from his anti-Nazi past, which led to his being trusted by the occupation authorities. He’d fought in the first war. So Germans didn’t doubt his patriotism.
And in the interwar period, he became an academic economist as director of a research institute. He was dismissed from his post by the Nazis for what they called defeatist views, anticipating postwar peace, and was part of the anti-Nazi resistance in the later stages of the war. His opposition to the Nazis was bolstered by an aversion to bureaucratic state planning, the economic dimension of National Socialism. He believed Germany could only recover by harnessing the talents of entrepreneurs liberated by markets and freedom from controls. He got his opportunity to put theory into practice during the postwar occupation. In 1947, industry was producing barely a third of 1938 levels, and food production only half.
There were chronic shortages and inflation exacerbated by a big increase in money supply. Inflation was suppressed by price controls, aggravating the shortages. And Germans spent much time foraging for food in the countryside and bartering for necessities. Large-scale absenteeism merely exacerbated the problem of supply. Erhard won the approval of the United States authorities for a radical programme, lifting price controls while currency reform and a drastic cut in money supply dealt with inflation. He also cut taxes. The marginal rate on a typical German fell from 85% to 18%. And the results were rapid and spectacular. Industrial production soared by three times in the decade 1948 to 1958, the Wirtschaftswunder. Absenteeism fell, as it was no longer necessary to forage for food.
This experience has often been used as a classic example of what happens when controls are scrapped and taxes slashed. And this is a very powerful ideological message which right-wing politicians around the world have seized upon. Critics have pointed out, however, that things were not quite so simple. A lot of controls remained. Many industries remained under public ownership– Volkswagen, for example. There were painful side effects from the reforms, including a temporary surge in unemployment. Germany also received at the same time a boost from the Marshall Plan, though this was offset by reparations and the cost to Germany of paying for the occupation.
In addition, Germany maintained its long tradition from the days of Bismarck of welfare state protection, which actually, Erhard strengthened with child allowances, housing benefit, and extended schooling. His Germany was very far from a free market paradise. There was an emphasis on order as well as liberalism, hence, ordoliberalism. Although primarily an economic technocrat, Erhard was also a politician. And he recognised the popularity of the welfare state to the extent that he allowed the budget deficit to rise uncomfortably. And he left office under a cloud with his economic reputation a little tarnished. Still, he’d accomplished the task of setting Germany on a highly successful economic course postwar. The miracle worker reputation has survived. And it’s inspired others.
And ordoliberalism remains a key element in German economic thinking today, a strong influence in the strongly pro-competition elements in the European Union, and very controversial when it’s exported, as it has been to the southern European countries in the Eurozone.

The German word ‘Ordo Liberalism’ describes a free market economy within a framework of order. Ludwig Erhard, initially Economics Minister and then Chancellor of post-war Germany, implemented reforms of the German economy which were guided by ordo liberalism.

In the film, Sir Vince Cable shares the story of how Erhard accomplished the task of setting Germany on a highly successful economic course post-war. Following on Erhard’s success, people on all sides of the political spectrum have found elements in his ordo liberalism to embrace. However, few have been able to replicate his concurrent emphasis on ‘ordo’ as well as on liberalism.

As an example of an appropriation of Ludwig Erhard by a group with distinct political persuasion, watch the film ‘Ludwig Erhard and the German Economic Miracle’. In the comments below share whether you think this film paints a complete picture of Erhard’s ordo liberalism.

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The Politics of Economics and the Economics of Politicians

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