In times of crisis, we consider what can be done to return to a path of prosperity and wealth. However, there is a tendency to mistake the previous manifestations of economic success—the sectors and products that an economy has, in the past, successfully produced—for the more fundamental source of success.
When, in 1947, Ludwig Erhard lifted price regulations and decisively shifted the German economic system away from heavy interventionism towards a free market economy, the stage was set for what is commonly—though perhaps misleadingly—referred to as the “German Economic Miracle.” The rest is history.
Today, there is a fundamental misunderstanding of the origins of wealth that endangers the already struggling German economy’s future. This misunderstanding is also observable in other societies. The mistake is taking the really-existing businesses and sectors that have emerged under a successful economic system to be the decisive element in an economy’s growth. For example, Germany’s economic system has produced an economy focused on, put very roughly (and, strictly speaking, of course, falsely), cars. So, one may conclude that all that is necessary for protecting and reinvigorating the German economy is to protect and support the German carmakers’ ability to produce cars. Precisely this is what many commentators on the German economic situation, as well as politicians, seem to believe. According to this view, the focus must be on ensuring favorable conditions for the auto sector, a proven powerhouse of the economy in the past.
This is not necessarily false—but if it is correct, it is correct contingently, not necessarily. Consider that a system of free enterprise will lead to the production of certain goods and services, and those may well lead to a focus on cars. But it could also lead to specialization in another industry, or to more diverse economic activity.
The goods and services that entrepreneurs focus on are not given or predetermined. Rather, in a free market, entrepreneurs who can produce profitably will succeed, regardless of the industry they operate in. It may well be that carmakers are exceptionally profitable. But the success of carmakers, or any other industry for that matter, is only worth celebrating when it is a manifestation of the healthy market economy.
So, what’s the lesson? It is that not industrial production, nor cars, nor any other sector was the decisive element for Germany’s economic success. These are just specific manifestations of that economy in this specific time and place. What the economy needs is a system that ensures market-tested success, not the prospering of any particular industry.
Instead, the decisive factor is the economic system, where entrepreneurs must be free to flourish while also being responsible for their actions. In other words, the free market is crucial—and, historically, it was the reason for the tremendous economic growth Germany experienced. In any economy’s past, this economic success will have manifested in certain sectors being central to the economy; tomorrow, it may be precisely these sectors again, but it could also involve completely different ones.
To retain—and in Germany’s case, regain—its economic clout, a society’s focus must be on its economic system, not on the sectors that have historically emerged as the strongest under that system. Put simply, what is required is a return to the free market, not the bolstering of one specific sector that has recently achieved success.
Now, let me be clear that there are certainly measures that would not only promote the specific sector that has historically brought success, such as the automotive sector in Germany, but also represent a return to free market principles. Consider deregulation and lowering corporate income taxes. However, the focus must always be on the market if the objective is to rekindle the economy, rather than on any specific sector that seems promising to politicians, such as subsidizing energy prices for industry.
This misunderstanding of what constitutes economic success permeates not only German policy recommendations but also those of many other countries. To some extent, it is understandable as the success of an economy manifests, or at least is primarily visible, in specific industries. However, this is precisely to misunderstand the true origins of a society’s economic miracle. You do not enrich your citizens by protecting an industry that has been successful in the past. Rather, at the basis of economic growth we find a solid market economy—just what Ludwig Erhard had restored in 1947 when he eliminated a host of government interventions to free the citizens from the constraints that had prevented them from enriching themselves and others.
