Freedom and Responsibility: The Social Market Economy in Germany, 1918-1963.

By A. J. Nicholls (New York: Oxford University Press, 1994. xiii plus 422pp.).

A. J. Nicholls offers here a collective intellectual biography of several key figures (especially Ludwig Erhard and Karl Schiller) in West Germany's adoption of the social market economy, along with an account of certain political developments that help explain that adoption. Like some of his subjects, he has relatively little to say about the social in social market economy. He is most interested in how West Germans came to have a market economy at all, given both the disrepute into which laissez-faire had fallen in interwar Germany and the collectivist bent of postwar public discourse.

Nicholls traces the post-1929 efforts of certain individuals, including Walter Eucken, Wilhelm Ropke, Alexander Rustow, Alfred Muller-Armack, and Ludwig Erhard, to bolster the intellectual respectability of market economies. These "neoliberals" acknowledged that laissez-faire had failed to provide social justice or economic efficiency. But they attacked both overweening, repressive governmental collectivism and unrestrained private monopoly or cartel power as threats to individual freedom and, indeed, economic efficiency. They argued that government must work both to create and maintain the legal framework for competitive markets and to ameliorate the poverty and inequality that unrestrained competition produced.

Interestingly, Nicholls's account suggests a certain moralistic subtext to the social market economy. Several of these thinkers favored the widest possible property ownership, as a bulwark against proletarianization and massification (a preference he refuses to define as nostalgic). The neoliberals began by seeking a "third way" between laissez-faire and collectivism but often became more conservative in the 1950s. What seemed to drive these men was a perhaps visceral distaste for the bigness, impersonality, and materialism of both big business and government bureaucracies, along with a desire for a society on a human and humane scale.

Nicholls insists that the social market economy could never have become established without the untiring labor of neoliberals in creating an intellectually respectable case for decontrolling the economy. Overwhelmingly, Germans in the 1940s still blamed free markets for the horrific depression of the 1930s, and most politicians (from socialists to conservatives) assumed that the devastated postwar German economy would need careful government nurturing for years. Most Germans recognized by 1948 the need for some drastic revision of the ramshackle structure of prewar, wartime, and postwar controls. But, Nicholls argues, they would almost certainly have sought to reform rather than abolish controls but for the intellectual cover that neoliberals gave to Erhard when he removed most price controls in connection with the June 1948 currency reform. And neoliberals provided Erhard with crucial support for the social market economy in the face of considerable criticism of Germany's short-term economic difficulties, 1948-1951.

Nicholls is, though, aware of the interest-group and political forces that were indispensable for Erhard's success. Business groups, who were consistently anticollectivist, helped finance the liberals and Christian Democrats who formed the Federal Republic's first governments. That support helped push those parties to accept Erhard's economic liberalization drive. And when big business did come to fight Erhard over anticartel legislation in the mid-1950s, the social market economy was already firmly established. West Germans' desire to distinguish their society from communist East Germany also seems to have bolstered Erhard's position. Furthermore, Nicholls' discussion suggests that Chancellor Konrad Adenauer's desire to keep the Social Democrats out of government forced him--very reluctantly--to back Erhard against more interventionist groups in the CDU.

Nicholls also traces the gradual acceptance of the social market economy within the Social Democratic Party. He assigns the key role to Karl Schiller, who had been exposed to free-market ideas when he studied economics in the 1930s. Schiller's arguments helped the party to recognize that persisting in its Marxist preferences would keep it forever out of government and that a Keynesian, social-market alternative to laissez-faire and to central planning did exist.

Nicholls writes well, and he is sensitive to the often substantial differences among the various neoliberals. And he connects their often abstract theorizing with the concrete policy decisions West German elites made and West German citizens accepted, 1948-1963.

Nicholls does not, though, prove that ideas determined or even significantly influenced the historical outcome. He shows that neoliberals provided theoretical arguments for competitive markets. But he has not investigated at all systematically the development of politicians' or businessmen's or the electorate's attitudes toward competition, cartels, and government intervention, so he cannot demonstrate how effective such arguments were. And his account of widespread frustration with controls in 1948 raises the possibility that liberalization was inevitable as the only known alternative to a discredited system.

Nicholls also wants to rescue the neoliberals from the charge that the social in their social market economy was just a meaningless sop to popular hopes. Unfortunately, his own minimal references to the social aspects of government policy and his argument that Erhard himself was uninterested in social issues (assuming that increased production would--somehow--make everyone better off) tend to undercut his point. The social programs West German governments introduced do seem to have been crucial for legitimating competitive markets and the inequality and occasional poverty they imposed. But Nicholls's work suggests that neoliberals were obsessed with production and only mouthed slogans about protecting the disadvantaged in the competitive struggle, so that those social programs came from elsewhere in German society.

Moreover, like most other work on postwar West German economic history, Nicholls's book asserts what needs to be demonstrated--that neoliberal policies were crucial for West German economic success. West Germany flourished under the social market economy, but so did other economies with different policies. Communist East Germany secured growth rates in material production, 19451979, that equalled West Germany's. And dirigiste France and inflationary Italy secured economic growth rates, 1945-1990, comparable to West Germany's. As attractive as the social market economy might seem, we will not be able to say with any assurance how good or necessary neoliberal policies in fact were until we investigate rigorously and comparatively the growth experiences of all the European--and indeed East Asian--states, 1945-1990.