Thursday, February 10, 2011

Revaluing the German Model

Six years ago, when I first started studying the German economic model (the soziale Marktwirtschaft, or social market economy, also known as the Rhenish model, ordoliberalism, or the stakeholding model), it was in serious disrepute.  Unemployment seemed permanently high, taxes were high, and it was claimed by many pundits that the soziale side of the equation was choking the Markt's efficiencies in a case of terminal Eurosclerosis.

But during the economic crisis of the last couple of years, the German model's virtues have become apparent, and it is back in favor.  Angela Merkel now proclaims from the Davos podium that other developed countries need to follow the German example.

Even The Economist is singing Germany's praise.  The current issues has three pieces on Germany, calling the economy "a machine running smoothly," a success case that "owes more to judgment than to luck," and a model to be emulated.  As The Economist's chart here shows, it has been a splendid decade for Germany.

The Economist, true to their liberal perspective, gives too much weight to the effects of capital and labor market liberalization.  These are certainly important factors, but, as I have argued in previous posts, Germany's current success owes much to the ethos of Mittelstand companies (often family-owned and valuing long relationships with employees) and programs such as the Kurzarbeit system that kept many Germans working, albeit with reduced hours, during the downturn.

Even Merle Hazard is (literally) singing Germany's praises

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